THE ASSESSMENT: INSTITUTIONS OF POLICY

This article reviews changes in thinking about the scope and design of government institutions. It looks at the rationales for privatization of state-owned utilities and the recent reforms in the U.K., New Zealand, and elsewhere to social service agencies and the institutions of economic policy making. After examining the role of public choice and principal-agent theories in shaping current attitudes, it notes the impossibility of complete contracting for the provision of many public services and emphasizes the importance of relational contracts in institutions where objectives are inevitably complex and many dimensions of performance difficult to verify. It concludes that commercial models are often inappropriate replacements for centralized political control. Many public service functions are best carried out by intermediate institutions. Management of these institutions should operate on franchises giving a renewable lease on assets held in trust. Accountability to stakeholders and the political authority should be periodic rather than continuous. Copyright 1994 by Oxford University Press.