The Political Economy of Public Administration: Institutional Choice in the Public Sector (Political Economy of Institutions and Decisions)

275 Pages·1995·6.14 MB·English

by  Murray J. Horn

Considerable academic and popular criticism has been directed at the way
public administration is organized and how it functions. Many claim that
the public sector lacks the incentives for effective performance and that
there is a disturbing lack of accountability to the elected representatives
whom administrators are supposed to serve. Why then do the administra-
tive arrangements that are perceived to promote this inefficiency and
undermine accountability remain intact?
It is argued that the characteristic institutional features of the public
sector persist because they serve the interests of the legislative coalitions
that use them. To secure continued electoral support, these coalitions
must deliver durable net benefits to their constituents. Administrative
arrangements are important because they affect "who gets what" from
legislation and the flow of legislative costs and benefits over time. An
enacting coalition will, for example, secure less support for legislation
whose benefits are easily undermined at the administrative level by the
decisions of administrative agents or by future political intervention in
administrative decision making. The costs of constraining administrative
agents and future politicians, and other forms of "transaction costs,"
impair the ability of legislators to deliver durable benefits to their constit-
uents. The distinctive governance, procedural, financing, and employ-
ment arrangements of different types of public sector organization - even
the boundary between public and private - are used by legislators to
address the transaction problems that arise in different situations.
This book should be of value to those with a practical interest in public
administration as well as students of political science, public administra-
tion, economics, and public policy.

THE POLITICAL ECONOMY OF PUBLIC ADMINISTRATION
POLITICAL ECONOMY OF INSTITUTIONS AND DECISIONS
Editors
James E. Alt, Harvard University
Douglass C. North, Washington University of St. Louis
Other books in the series
James E. Alt and Keneth Shepsle, eds., Perspectives on Positive Political
Economy
Alberto Alesina and Howard Rosenthal, Partisan Politics, Divided
Government, and the Economy
Yoram Barzel, Economic Analysis of Property Rights
Jeffrey S. Banks and Eric A. Hanushek, Modern Political Economy:
Old Topics, New Directions
Robert Bates, Beyond the Miracle of the Market: The Political
Economy of Agrarian Development in Kenya
Gary W. Cox, The Efficient Secret: The Cabinet and the Development
of Political Parties in Victorian England
Peter Cowhey and Mathew McCubbins, Structure and Policy in Japan
and the United States
Jean Ensminger, Making a Market: The Institutional Transformation of
an African Society
Jack Knight, Institutions and Social Conflict
Michael Laver and Kenneth Shepsle, Cabinet Ministers and
Parliamentary Government
Leif Lewin, Ideology and Strategy: A Century of Swedish Politics
(English Edition)
Gary Libecap, Contracting for Property Rights
Matthew D. McCubbins and Terry Sullivan, eds., Congress: Structure
and Policy
Gary J. Miller, Managerial Dilemmas: The Political Economy of
Hierarchy
Douglass C. North, Institutions, Institutional Change, and Economic
Performance
Elinor Ostrom, Governing the Commons: The Evolution of Institutions
for Collective Action
J. Mark Ramseyer and Frances M. Rosenbluth, The Politics of
Oligarchy: Institutional Choice in Imperial Japan
Jean-Laurent Rosenthal, The Fruits of Revolution: Property Rights,
Litigation, and French Agriculture
Charles Stewart III, Budget Reform Politics: The Design of the
Appropriations Process in the House of Representatives, 1865-1921
John Waterbury, Exposed to Innumerable Delusions
THE POLITICAL
ECONOMY OF PUBLIC
ADMINISTRATION
Institutional choice in the public sector
MURRAY J. HORN
The Treasury
New Zealand
I CAMBRIDGE
UNIVERSITY PRESS
Published by the Press Syndicate of the University of Cambridge
The Pitt Building, Trumpington Street, Cambridge CB2 1RP
40 West 20th Street, New York, NY 10011-4211, USA
10 Stamford Road, Oakleigh, Melbourne 3166, Australia
© Cambridge University Press 1995
First published 1995
Library of Congress Cataloging-in-Publication Data
Horn, Murray J.
The political economy of public administration : institutional
choice in the public sector / Murray J. Horn.
p. cm. - (Political economy of institutions and decisions)
Includes bibliographical references and index.
ISBN 0-521-48201-1. - ISBN 0-521-48436-7 (pbk.)
1. Public administration. 2. Transaction costs.
3. Administrative agencies. 4. Executive departments.
5. Independent regulatory commissions. 6. Government business
enterprises. I. Title. II. Series.
JK1411.H67 1995
350-dc20 94-44897
CIP
A catalog record for this book is available from the British Library.
ISBN 0-521-48201-1 hardback
ISBN 0-521-48436-7 paperback
Transferred to digital printing 2002
Contents
Series editors' preface page vii
Acknowledgments ix
1 Introduction 1
2 Basic theory and method: A transactions cost approach 7
3 Regulatory institutions 40
4 Bureaus and the budget 79
5 Bureaus and the civil service 95
6 Public versus private enterprise 134
7 Public enterprise versus public bureau 170
8 Conclusion 182
Appendixes 195
Notes 213
Bibliography 241
Author index 257
Subject index 260

Series editors' preface
The Cambridge series on the Political Economy of Institutions and Deci-
sions is built around attempts to answer two central questions: How do
institutions evolve in response to individual incentives, strategies, and
choices, and How do institutions affect the performance of political and
economic systems? The scope of the series is comparative and historical
rather than international or specifically American, and the focus is posi-
tive rather than normative.
Murray Horn has combined his academic insight and practical experi-
ence to fashion a major advance in transactions cost theories of institu-
tional design. He starts with a frequently described situation in which
issue complexity and the consequent desire to take advantage of specializ-
ation lead representative assemblies to rely on the opinions and actions of
bureaucratic agents. Since the exchanges between legislators and their
constituents are typically not simultaneous (flows of benefits to legislators
are often more immediate than to constituents), he argues that legislators
when creating agency missions need to add durability to their deals with
forward-looking constituents by protecting the agency against subsequent
legislative modification, while protecting themselves against agency ac-
tions detrimental to legislative interests.
Horn theorizes that enacting coalitions in this situation design agencies
by solving an instrument assignment problem to minimize the transaction
costs they face. They set the extent to which decisions are delegated, the
governance structure of the administrative agent, rules specifying pro-
cedures to be followed in administrative decision making, the nature and
degree of legislative monitoring and ex post rewards and sanctions, and
"rules" governing the allocation and use of capital and labor to minimize
the sum of costs of decision making, agency, commitment (durability),
and uncertainty. This model allows predictions about the type of organi-
zation that will be used in a variety of circumstances, including state-
vn
Series editors' preface
owned enterprises for sales-financed production, bureaus for tax-
financed production, and courts or commissions for regulatory policy.
The book puts forward many arguments that the field of political econ-
omy will have to confront, and creates many exciting opportunities for
systematic empirical work.
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