Public sector investment failures: theoretical contributions from new institutional and Austrian economic theory

This paper illustrates how two contemporary economic traditions – New Institutional and Austrian economics – may be used to add insight into the organization and governance of public sector investment programs. When combined, these frameworks offer a theoretical foundation that may be used for the purposes of assessing relative levels of agency and transactions costs within different institutional settings. The insights provided suggest that one option for reducing these costs is to ‘outsource’ the public sector investment function. The theories explored in the paper are not panacea for dealing with agency and transaction costs, but they do draw attention to key institutional characteristics that influence their size.