Impact of New Institutional Economics on New Public Management

Abstract As pointed out by institutional economics, economic indicators may be improved by social institutions that maintain peace and order. Old Institutional Economics (OIE) believes that government should solve systemic socioeconomic problems according to given ideology. On the other hand, New Institutional Economics (NIE) supports only very little or state independent. Public choice theory, property rights, and agency theory have been of great importance in shaping New Public Management (NPM) through transaction cost theory application that underlies government role as regulator and controller. Following NIE, NPM has incorporated measures such as cutting down government, increasing efficiency and effectiveness, encouraging cost effectiveness, decentralizing power, and providing services at uniform standards. This study aimed to determine how NPM developed from the different theories related to NIE. This research evaluates NIE applications, i.e., public choice, transaction costs, and agency and property rights, in relation to NPM reform evolution, development, and execution. The study also considers institutional challenges on promoting market-driven public management practices. NIE ideas are combined with NPM principles such as effectiveness, marketization, and focus on results. It analyses the part played by institutional mechanisms in these reforms or not and tries to say what conditions lead to successful NPM reforms with regard to institutional factors. This study demonstrates that NIE can explain changes in public administration and may serve as advice for policymakers in proper reforms. Moreover, certain adaptation approaches are recommended for assessing institutional impediments prior to NPM reforms. Nevertheless, research recognizes limitations, including methodological problems in quantifying institutional variables, difficulties in determining cause–effect links between institutional factors and reform results, as well as the challenge of isolating NIE’s impact from other factors in public sector reform.