Transaction Costs , Politics , Regulatory Institutions , and Regulatory Outcomes

In order to provide a more complete framework for assessing the efficiency of government intervention, it is necessary to move away from the idealistic perspective typically found in the normative approach to traditional Public Economics. Such a move requires that the government be viewed not as a single, monolithic entity, but as a number of different government bodies with their own constituencies and regulatory tools. The “multi-tiered”government is limited in its ability to commit and is subject to interest groups affecting the regulatory process and imposing significant transaction costs on government interventions and ultimately, on their outcome. In this paper, we discuss the nature of these transaction costs and argue that the overall design of the government is the result of their minimization. Applying this approach, we derive some consequences, highlighting in particular the impact on regulatory outcomes. The Economic Development Institute of the World Bank 1998