Transaction Cost Analysis in the Public Sector

Transaction cost analysis in the public sector applies the economics of organisation to decisions about how government should structure the provision of goods and services — in house, by contract, or through hybrid arrangements. Oliver Williamson's 1981 article The Economics of Organization set out the transaction-cost approach, arguing that the choice of governance structure should economise on the costs of negotiating, monitoring and enforcing exchanges, not just on production costs. The method identifies the relevant transaction, assesses its attributes such as asset specificity and uncertainty, enumerates the governance alternatives, and aligns the structure to the transaction so that total cost is minimised. Its purpose is to explain and guide make-or-buy and contracting decisions in public administration.