Transaction cost politics and the National Endowment for the Arts

Abstract

Cultural economists have traditionally justified public funding of the arts through the claim that there are “market failures,” particularly externalities, in the consumption of the arts. But when we try to explain the wide variation in funding for the United States’ federal arts funding agency, the National Endowment for the Arts (NEA), we find that something more than the usual economists’ model is required, since it is not evident that fluctuation in the degree of market failure has been sufficiently large to provide an explanation of the NEA's history. This paper advocates a transaction cost approach to thinking about the economics and politics of arts funding. It finds that the transaction cost politics method of looking at the “delegation problem”—the decision by elected legislators to provide bureaucratic agencies with a certain amount of decision-making discretion—gives a fruitful means of explaining the declining fortunes of the NEA through the 1990s, as well as changes to its administrative structure.