Impact of New Institutional Economics on New Public Management

According to this theory, independent administrative authorities are capable of dealing with issues that arise from imbalance information under the principal–agent framework. Issues include political instability and adverse selection and others.

According to this concept, institutions are important for society that helps determine what is right and wrong. It suggests that giving some freedom to non-partisan government agencies can create system where everyone is answerable to each other.

This method researches how national governments use international laws for controlling societies. It looks into examining on power relationships among different social groups.

This examines how language is used within public policy formulation and implementation, as well as political tradition. Institutional economics did not contribute to a holistic method that was supported by NIE; nevertheless, they allowed for induction at macro analysis (Turgut, et al., 2021, p.408). With a new approach, it is believed that institutional values are shaped by individual behavior, but in the traditional approach, it was argued that social institutions control individuals’ behavior. In other words, neoclassical economics is a complete rejection of old approaches, although it is still using some techniques from older economic theories. Institutional concept is incorporated in neoclassical theory in the new approach, hence moving forward with neo-classical analysis (Petrovic and Stefanovic, 2009). When neoclassical economics underwent crisis, transaction cost approach served for school rebirth. Both adopt an evolutionary method, see economics as non-static science, and attach great importance to history. The issue of imperfect contracts is also analyzed under NIE, whereby agents may act dishonestly in decision-making.

However, people are capable of having dependable contracts by reducing possible risks through relying on their instincts, even if incomplete contracts occur because of limited costs that cannot be avoided (Williamson, 2007, pp.9-10). NIE supporters emphasize on efficiency and study institutional impacts on resources allocation as well as economic performance.

On the other hand, classical institutional economics research proponents focus on restructuring society by altering economics to reflect more on social values, hence improving the overall social welfare (Spithoven, 2019). According to new institutionalists, first method is old-fashioned, weak in logic, and too much focused on group while ignoring individual rational choices. It was also noted that this approach is unable to solve savings problem and remains inflexible with respect to institutions (Dibo, 2019, pp.30-31, Table 1). Content comparison in old and NIE is depicted in Table 1.

It is difficult to say exactly why some countries have done better economically than others. Moreover, it is difficult to obtain accurate information, as the theory is based on assumptions that may not be true in reality. As a result, the framework becomes highly theoretical and therefore fails to offer any meaningful solutions to real problems (Lloyd and Mee, 2016; Grinberg, 2018; Gray, 2018). Recent versions on NIE have looked at power, rent–seeking, and how crises affect economic growth. North and others have also contributed highlighting de jure and de facto authorities’ role in taxation taking into account factors like clientelism and access opportunities. Apart from formal institutional setups, NIE has now also focused informal ones – for example, sociocultural practices and norms – in conditioning economic behavior (Gray, 2018).

Over 126 million academic publications were reviewed in Semantic Scholar repository. First, 50 documents that had high relevance toward research were obtained. We included sources that provided these requirements in our design:

• Geographic Scope: Is research focused on the United Kingdom, Scandinavia (including Norway, Sweden, Denmark, Finland, and Iceland), New Zealand, or developing countries where reforms are analyzed?

• Research Area in Study: Does research focus mainly on policies, governance, public sector, or institutional reforms?

• Empirical Analysis: Is there any study that provides deep empirical analysis about specific reform cases? Does it take into account history, identify major players, describe institutional transformations, and provide measurable outcomes?

• Outcome Measurement: Does study comprise any numerical or non-numerical reform’s impact evaluation or consequence?

• Methodological Rigor: Is there case study application approach with sufficient analytical depth in research, or maybe a systematic review, primary empirical research, meta-analysis, or thorough literature analysis?

• Empirical Foundation: Is study solely theoretical or conceptual, or does it include empirical case studies/data?

• Analytical Detail: Does study deeply analyze reforms instead of giving them a brief mention? If yes, does it include development history, key figures, organizational transformations, and reform effects?

When deciding whether to eliminate each paper, we too considered all questions at once.

Each column below was extracted from each academic paper. For each column, we provided model with extraction instructions listed below.

Type of Reform and Timeline:

• Determine and extract on health system or public sector reform included in the study. Include the following:

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    Certain years in reforms were implemented.

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    Significant changes in laws or policies.

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    Particular structural adjustments made to public management or health systems.

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    Chronological order of reforms.

If more than one is mentioned, reform periods are listed in chronological order. Use terms like "late 1980s" or "early 1990s" as they occur in the study if specific dates are not mentioned. Note "dates not specified" if no precise dates are provided.

• Actors and Institutional Changes:

  Extract information about:

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    Institutional players participating in reform (as government agencies and health boards).

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    Modifications on roles and responsibilities.

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    Important policy architects or decision-makers.

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    Organizational restructuring (e.g., separating departments, establishing new agencies).

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    Concentrate on obtaining accurate institutional changes. List changes in methodical order if more than one is described. Include the actors' organizations if their names are mentioned.

• Theoretical Framework and Reform Objectives:

  Determine and extract the following:

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    Clear objectives and justifications for reform.

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    Outlined goals for increased effectiveness, accountability, or service delivery.

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    Theoretical supports of reform (e.g., NPM).

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    If possible, quote straight from the manuscript. If more than one aim is stated, list or rank them according to importance. Note "objectives not explicitly defined" if there are no explicit goals mentioned.

• Measurable Results and Performance Evaluation:

  Extract information about the following:

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    Particular performance indicators or results used to assess the reform, quantitative or qualitative evaluations of reform efficacy, enhancement or constraint findings in system performance, and before-and-after reform comparisons. Give priority to concrete or numerical indicators. If results are descriptive, provide main ideas briefly. Note "no specific outcomes reported," if no measurable results are found.

• Continuity and Theoretical Interpretation:

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    Determine substantive change degree versus system continuity, theoretical reform trajectories and interpretations, challenges to oversimplified narratives on systemic transformation, and enduring institutional characteristics that are critically analyzed in the study.

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    Take direct quotes that demonstrate the authors’ critical perspective. This study underscores the inherent complexity and nuanced character of the proposed reform appraisals.

NPM adopts NIE combination and is based on managerialism, such as agency theory, transaction cost economics, public choice theory, and property rights (Hood, 1991, pp.5-6). Globalization aims an administrative culture focused on efficiency and decentralization by transferring NPM practices around the world. Different market-oriented, political, analytical, and liberal management approaches have been extensively integrated into NPM. Market-oriented management seeks to enhance performance while reducing costs in a competitive environment by splitting services production and delivery, thereby providing public services more efficiently (Özer, 2021, pp.202-203).

Leadership in the United Kingdom is based on incremental change New Zealand/Australia attaches importance to: impartiality, integrity, hierarchy, and citizenship for effectiveness, efficiency, economy, and competitiveness. Many criticisms are directed against the traditional Weberian model on inefficiencies and extreme public expenses. There are also contracts alongside permanent jobs in public service (Dowding, 1993, pp.243-245). It has been proposed that private sector management approaches will enhance customer care as well as increase public sector capacity through government objectives and functions in public goods (Pollitt and Bouckaert, 2011, pp.10-14; Hughes, 2017, pp.50-73; Lapuente and Walle, 2020).

Splitting units in the public sector has eased corporate strategies as well as short-term contract employment while also facilitating limited output that is measured in quantitative. In this regard, performance incentives combined with resource protection and discipline will improve customer orientation (Pfiffner, 2004; Obińska-Wajda, 2016). Learning organizations within the public sector are believed to better facilitate NPM implementation ideas and adapt to change and overcome emerging problems. It is argued by some that public administration should take on this strategy to deal with ever increasing modern era complexities and offer bigger, fairer, and enduring solutions (Christensen and Lægreid, 2011; Young, et al., 2020; Osborne and Strokosch, 2022; Stivers, et al., 2023). This chapter explores impact of NIE on NPM with regard to public choice, transaction costs, property rights, and agency theories.

At every level, whether local or central, people see public administration as system consist of many interconnected organizations and agents. Specifically, it includes not just the basic framework of such organizations and units but also how they relate with society at large as well as authorities (Rosenbloom, et al., 2022; Farazmand, 2023).

Public choice theory applies economic methods to answer important questions in political science. It studies how people vote, what politicians do, and how government officials act. This theory looks into what government examined to do and not do, with regard to its analysis on interactions between different players within political, civil, and administrative perspectives. It becomes even stronger when combined with constitutional economics (Doğan and Kurt, 2016, p.118).

Public choice theorists discuss that public interest relies on subjective judgments. These critics argue that when government intervenes in economy, it increases corruption both at bureaucratic level and within politics (Özer and Kartal, 2021, pp.50-51). As stated by Özer and Kartal (2021, pp.53-65), theory is based on three core principles.

• Methodological Individualism: Public choice theory is based on fundamental assumption that people are rational and they always try to act as to serve their interests.

• Political Exchange: Rent-seeking transactions can be compared to trades and occur among individuals participating in politics. This is known as catallaxy, term that explains politics in relation to exchange tactics. In politics, it is easier to protect individual interests those of collectives (Vanberg and Buchanan, 1989, p.61).

• Rationality and Maximand (Utility Maximization): Just like in the private sector, the public sector seems to prioritize individual interests first. Parliamentarians support raising unnecessary institutional staff and budgets to provide additional help at their disposal. On the other hand, civil servants may seek for high inflation rates to increase their status and command more respect. As a result, they increase unjustified funds and expenditures in public sector with ineffective civil service and disequilibrium in economy resulting from government interferences in market. Some authors have suggested that social welfare schemes offered through public administration as a way of helping the poor during economic meltdown may be viewed by politicians as gaining maximum votes (Self, 1994; Casady, et al., 2020; Kuhn, et al., 2021; Blom, et al., 2021).

Many theories of how the economy works rely on the idea that the government is the answer to certain problems. But what happens when things go wrong? This is known as "Public Choice," which argues that the state is inefficient in providing goods and services.

Instead, it may do more harm than good by creating its own problem sets. Buchanan believed that tax brackets, the informal economy, and ceiling price fluctuations needed to be addressed through "constitutional constraint."

This would limit the state power to what is absolutely necessary – a view shared by others placing in this tradition. According to constitutional economics, constitutional rules should say exactly how much can be taxed, if money can be printed or loans taken – all that is part of any given constitutional social contract.

Anything outside what is explicitly allowed should have been regarded as damaging society's interests, imposing penalties for unauthorized acts, breaking individual’s freedom, or violating the constitution's social contract.

The result is what economists term a principal-agent problem – which may also emerge in corporate hierarchical structures. Only higher-ups (or superiors) can control. Public choice theory argues that there is always going to be problems with the state providing goods and services efficiently: It thinks that this might be solved if different parts of the organization had an incentive to check on each other – creating "competition" between offices for control.

Since the 1960s, those interested in public choice economics have believed that there is a link between monopoly, limited freedom, and less chance for private initiative; and that this results in public economy failures (in other words, it behaves much like bad market economy).

Much research into how resources are allocated within the public sector focuses on process efficiency – problems caused by rules, laws, etc. which are said to be an integral part of institutions. Some studies conclude that even in highly liberal nations like America where they think individual freedoms really matter, that if about 30% was made available for public use from private earnings by different means, things wouldn’t work so well. As a result of this occurrence, people have tended to be very critical on the public sector under NPM paradigm (Williamson, 1999; Groot and Budding, 2008). According to Hood, the study revealed that civil servants act rationally by seeking to maximize their own welfare at expense of public interest. This author supports public choice theory in NPM and encourages performance-related rewards. For example, during the late 1980s in New Zealand, government applied public choice policies to overcome slow bureaucracy within ministries by creating organizations that would operate depending on specified outputs (Hood, 1991).

Public choice theory in practice has allowed setting up reward systems in public service that match with the private sector. Many have supported for outsourcing of some public functions to reduce losses that occur when public organizations act rent seeking. Taxonomies have been simplified, while deregulation steps taken so as to curb corruption among the public officers. Public choice theory (Shaw, n. d.; Negoita, 2018) in NPM approaches aims at improving public services delivery and cutting down red tape. Whether it is or not, this theory too is not free from criticism. It questions pure personal motives in politics while highlighting the role of common well in politics; hence, it poses that social evaluation should take economic entity on society as separate from individualism.

Although exchange of goods and services creates wealth, it also produces "transaction costs." It was first described and examined by John R. Commons in his 1934 book, "Legal Foundations of Capitalism". "Price" of goods and services is the most obvious transaction cost because it reflects the exchange that must take place for goods to move from producer to consumer. Constant exchange (or "transaction") of goods, services, and information within and between organizations requires communication. In order for this communication to take place, there are many costs including: interviewing, controlling, and coordinating between units. Several costs make up "transaction costs" within market exchange: searching costs, bargaining costs, obtaining property rights and defending them, and selling costs. All of these factors can act as a deterrent to an exchange taking place, thereby inhibiting specialization and trade – two crucial components to economic growth and efficiency, because; "transaction costs" have a tendency to slow down or prevent trade from taking place, economists have sought ways to minimize or get rid of them altogether. To reduce transaction costs is to trust someone; trust means not having to spend time and energy on ensuring that both sides are keeping their bargain. Also if there is justice when trade or exchanges go wrong, transaction costs can again be reduced. Thus, trust in people you trade with and systems that back support or exchange (education, legal, political, or economic systems) reduces transaction costs, fosters greater trade (exchange), and increases professional specialization that leads to wealth.

Strategic decisions about transaction management, contracts, and agreement structures are informed by vertical integration. Transaction cost and production expenses are planned carefully when one assesses how best services should be offered. To make it easier for decisions and for action plans, such contracts define objectives, functions, and performance standards (Zajac and Olsen, 1993; Verhaegen and Huylenbroeck, 1999). Taking into account transactional costs, public administrators may plan contracts that reduce opportunism and improve service quality. Comparing bureaucracy expenses and top-down decisions, managers can determine cheaper alternative organizational arrangements and decision-making mechanisms (Ferris and Tang, 1993; Lynn, 1998; Wallis and Dollery, 1999; Dollery, 2005).

Oversimplification of public administration’s complex nature appears an important issue. Public administration is so complex that it becomes impossible to draw all costs into transactions, as there are many people involved in the decision-making process who have different purposes and interests. Additionally, in public administration, one cannot always assume that people behave rationally and have perfect information, unlike what is assumed in transaction cost economics. Public officials and decision-makers may not always follow predicted rational behavior as there is asymmetric information and other factors acting against it in politics and public service (Ferris and Tang, 1993; Lynn, 1998; Wallis and Dollery, 1999; Dollery, 2005).

Transaction cost theory suggested by Williamson provides improving public organizations through analyzing relationships between its components. According to this theory, there are only two choices for government regarding to public service provision: either direct provision or contracting. NPM has been seen to affect efforts for outsourcing as well as privatization under this theory. For instance, it was observed in the United Kingdom during the 1990s that National Health Service outsourced some auxiliary services and this could be explained by transaction costs influencing on administrative functions. Using optimum resource, reduction in uncertainty all come as a result of clearly defined property rights. This agrees with NPM which encourages identification of one’s property and responsibility as seen in public enterprises and reforms in asset management. This theory has been applied in Sweden and presents to accountability on public services and is based on performance yet under government control.

Furthermore, agency theory is based on accountability systems in NPM. NPM operationalizes agency theory with performance contracts, reporting requirements and incentive structures, for example; Australia uses performance-based annual contracts to public managers (Dollery, 2005; Williamson, 2007; Terman, 2011; Hansen, 2020; Chen, 2024).

Law recognizes two types on property rights: absolute and partial. Different people have property rights depending on which they are in economy, and these rights affect their behavior and, therefore, all economic system (Derya, 2017, pp.1105-1106). Internalization of external costs will be made easier and economically better if there are well-defined property rights. Asset is anything that one can have several options on, such as being able to take advantage over other people, as well as assessing and preventing possible harm (Obińska-Wajda, 2016).

Agency theory takes relationships that extend beyond traditional principal–agent regulation to include resource relationships, and theory deals with tracking relationship partners in resource–exchange relationships, whether relationships involve parties in organization or outside (Müller and Schmitz, 2016).

Sometimes, agent acts in their own best interest instead of principal. To mitigate this possibility, principals suffer tracking costs: "It may cost principal some money or effort to ensure that agent acts in principal’s best interests." For Şişmanoğlu, et al. (2020, pp.982-983), there are three agency costs: tracking costs, which we just defined; bonding costs, costs an agent suffer to reassure principal; and residual loss, representing total cost tracking and bonding. Agents often have narrower perspective from principals, and principals may not always be able to anticipate what an agent is likely to do in situation, and so tracking becomes important to ensure that the agent acts in principal’s best interests. Tracking can also be important in mitigating risks associated with transactions high in both risk and uncertainty.

According to Tosi, et al. (2003), contracts (including formal contracts as well as less formal agreements) play an important role for principals and agents alike because they communicate expectations regarding roles and responsibilities. In this context, setting objectives and evaluating agent performance relative to those objectives can help both principals and agents take appropriate action.

For principals – often public officials who need to understand whether a contract made with an agent has been carried out successfully – the ability to evaluate agents’ performance relative to agents’ contractual obligations is particularly important. In public service, agent performance information availability often requires public service providers to report, and there to be transparency as to what agents do; so, as Williamson (2000) points out, this represents "bridge for information gap in agency relations."

This theory explains that there are two major problems in public administration, that is, adverse selection and moral hazard. It is adverse selection when the principal signs a contract not knowing well enough the agents’ capacity or intent. Take, for instance, a scenario where the government agency may fail to comprehend the abilities and driving factors of a contractor when hiring him for a particular project. On the other hand, moral hazard may occur if an agent executes disapproved acts which the principal cannot see or control (Wallis and Dollery, 1999; Dollery, 2005; Lane, 2020).

Different structural and cultural components in NPM and subsequent reforms make the public sector turn into a complicated patchwork of strategies that may not be in line with simple assumptions on classical economic theories. Nevertheless, NIE has played a great role in improving NPM and public management as a whole. By taking this approach, it has become possible to set up management systems that are both transparent and accountable; this has enhanced transparency and accountability while also creating mechanisms through which government can offer public services effectively (Williamson, 2000; Groot and Budding, 2008; Basu, 2016; Hijal-Moghrabi, et al., 2020).

NIE removes bureaucratic barriers, which leads to faster decision-making, creativity and flexibility in public sector, NPM reforms greatly influenced, because; these NPM initiatives are enhanced in their capacity to learn, adapt and keep changing through important cultural and normative diversities.

In addition, this flexibility has made it possible for service delivery. These include quasi-markets and public–private partnerships because they still maintain centralized decision-making. Transfer of NPM ideas into an administrative system has led to market-oriented, customer-focused, and performance-driven strategies in public administration (Groot and Budding, 2008; Lapsley, 2008; Pillay, 2008; De Vries and Némec, 2013; Osborne, et al., 2015; Basu, 2016; Mansour, 2018). NIE’s influences are shown in Table 4.

Traditional public administration has limitations that could be solved by NPM since it evolves with changes in politics and economics and applies fundamentals from NIE (Page, 2005). NPM analyzed how important institutions operate in the public sector.

It includes creating transparent organizational governance, ensuring that organizational behavior supports institutional aims, eliminating red tape from organizations, and concentrating on how management techniques depend on the economy and institutions (see Table 4).

NIE's major input in state reorganization can be seen through organizational reforms implementation in public institutions. As a result, public policy formulation and implementation processes are now better separated. Political advisers in decision-making processes have been part of separation that has enhanced executive function within bureaucracy. In particular, NIE’s focus on reducing transaction costs links with NPM efficiency. Transaction cost theory in NIE and the NPM methodologies both seek to eradicate inefficiencies and make organizations operate effectively. Too many strict rules increase costs doing business (transaction costs) and prevent entrepreneurship. Centralization is believed to increase transaction costs. NPM initiatives are driven by property rights and use performance contracts as well as measurable output for defining roles in public organizations. These contracts ensure that performance-oriented pay on output and results.

Agency theory works well when public utilities are privatized or when it presents alternative public service delivery mechanisms. Multi-centered governance analysis by Ostrom and other colleagues played a big role in NPM. Through this analysis, they proved that it is possible for system with many decision centers to work smoothly without being controlled from top down, which posed a challenge to traditional centralized methods. As a result, decentralized models on service delivery and common joint ventures were formulated during NPM reforms. Water resource management reforms within metropolitan areas across the United States led to the establishment of specialized function-based administrative units as opposed to consolidated metro authorities (Ostrom, 2010). It becomes complex applying NPM in the public sector because of non-profit character in public services despite all above stated advantages.

Focusing too much on market fundamentals jeopardizes social justice and compromises serving public ethic (Schneider and Doner, 2000; Meramveliotakis, 2020; Stein, 2021; Chau and Pham, 2021). In the World Bank report "The State in a Changing World," Peter Evans emphasized the need for enhancing state capacity to regulate markets. In his lecture entitled "Redefining the Role of the State," Stiglitz argued that South Asian debacle calls for discarding minimal state notion while posing that it is crucial to reformulate what state should really do (Levent, 2006, pp.23-27).

Public management reforms worldwide and in OECD countries have been greatly affected by NIE. Using agency theory to deal with bureaucratic self-interest, transaction costs, organizational boundaries, and property rights and to design responsibility structures, New Zealand included public choice theory in reform agenda. While these changes initially increased efficiency, they later revealed problems with coordination and social justice. The United Kingdom took a more cautious stance on changing property rights, but it still applied agency theory and transaction cost economics in public sector reforms.

Research into semi-autonomous organizations (quangos) has shown annual productivity increases of 3% to 5%. Difficulties in balancing autonomy and control during reform process and political obstacles in NIE principles are available. Drawing on NIE, public management research can better illuminate the often overlooked significance of institutional functioning in advancing public values, ways to adapt reforms to local government which are holistic rather fragmented. These reforms have drawn criticism for granting disproportionate power to managerial elites and private contractors at the expense of the traditional bureaucratic apparatus, for creating a hybrid public personnel system that performs both bureaucratic and entrepreneurial functions through new institutional market – based mechanisms within old-style bureaucracies.

In many cases, NPM changes failed to reduce overall transaction costs; instead, they created additional transaction costs associated with measuring performance. Transforming large bureaucracies into specialized agencies on transaction costs has led to coordination problems.

Agency theory has failed to meet many principals’ different goals. This has resulted in reduced participation, limiting accountability (Dollery, 2001; Terman, 2011; Hansen, 2020; Chen, 2024). It ignores cultural and historical differences emphasized by North in his subsequent publications when presupposing that identical formal settings would produce similar results globally. Anglo-Saxon nations, for example, the United States and the United Kingdom, prefer autonomy and structural separation, using subcontracting and performance-related pay on market mechanisms.

Privatization, performance measurement, and decentralization are not very advanced in continental Europe and are also moderate. Customer focus and decentralization are very strong in Scandinavia, but again, public service marketization is not very advanced. Empirical studies in developing countries highlight important institutional capacity for success on NIE inspired reforms. Political economy factors affect how reforms perform. Anglo-American bias in NPM practices fails to take into account unique state–society relationships found within Napoleonic, Germanic, and Scandinavian governance models. NPM reforms in developing countries have led to isomorphic analogy, which can be described as frontline reform that meet aims yet does not improve administrative efficiency.

Future scholars should evaluate public administrators as bricoleurs who combine different managerial elements but not follow NIE in public administration strictly. Transaction costs should take into account democracy values, equality, and institutional potential. In addition, there is a need for the evaluation of frameworks on public value performance. Cross-level comparative research would be worthwhile and may explore hybrid governance modes that integrate NIE and post-NPM perspectives. NPM is complex, debatable, and paradoxical reform process with democratic strategies and not just NIE principle application. Relation between NIE and NPM shows that public administration reforms transform mechanical theories to contextually sensitive institutional approaches with such variations seen under different socio-political and economic environments (Alston, 2008; Hammerschmid, et al., 2016; Fabrizio and Guashino, 2020; Vaishali, 2024).