There is a considerable shortage of improved seed in Ethiopia. Despite good reasons to invest in this market, private sector investments are not observed. Using an institutional economics theoretical framework, this paper analyzes the formal Ethiopian seed system and identifies transaction costs to find potential starting points for institutional innovations. Analyzing data from more than 60 expert interviews conducted in Ethiopia mainly in 2012, 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, direct marketing pilots that have been started recently are a signal of careful market liberalization efforts.