Basic theory and method: A transactions cost approach

Abstract

This chapter presents the theory that will be used to explain different forms of public sector organization in the rest of this book. It discusses the assumptions that underpin the analysis, the transactions theory that is used to explain institutional choice, and the way that this theory will be applied and tested. It also places the approach adopted here in the context of the relevant economic and political science literature. ASSUMPTIONS The key assumptions describe the nature of decision making and the roles and motivations of the three main actors: legislators, administrators, and constituents. Nature of decision making Assumptions about the nature of decision making used here are characteristic of most economic literature and of the “rational choice” literature in political science. Decisions are assumed to be made by individuals who act as if largely self-interested and rational in pursuit of this interest. Self-interest does not imply that individuals do not care for others, but rather that individuals put their own interests ahead of others when these conflict. The implication is that we cannot rely entirely on “good nature” to ensure that individuals act in the interests of others. It is therefore possible to fashion incentives to improve the alignment of individual interests with wider objectives. For example, while people may be attracted to the civil service by a desire to serve the public, they are likely to devote greater effort to this service if they think that increased effort will enhance their chances of promotion.