There is a considerable shortage of improved seed in Ethiopia. Despite good reasons to invest in this market, private sector investments are not occurring. Using an institutional economics theoretical framework, this chapter analyzes the formal Ethiopian seed system and identifies transaction costs to find potential starting points for institutional innovations. Analyzing data from more than 50 expert interviews conducted in Ethiopia, it appears that transaction costs are high along the whole seed value chain and mainly born by the government, as public organizations dominate the Ethiopian seed system, leaving little room for the private sector. However, recent direct marketing pilots are a signal of careful efforts towards market liberalization.