High-Powered and Low-Powered Incentives in the Public Sector

Transaction-cost economics currently has a strong influence on the study of private-sector institutions, but attempts to apply it to the public sector have been less successful, particularly in the area of internal organization. I argue that the standard framework of transaction-cost economics must be adjusted to the distinctive characteristics of the public sector, and that the key is a rethinking of the idea of high-powered and low-powered incentives. I show that with this extension transaction-cost economics can provide insight into such important current issues as earmarking, public authorities, and civil service personnel systems.