In this work, I address foundational concerns at the interface of institutions, governance structure, transaction costs, and efficiency in public-private contracting. Following transaction cost economic perspective, I build and justify the theoretical models explaining that institutions may affect the economic performance of public-private contracting through the effect of transaction costs. I explore to what extent a transaction costs economizing motive pertains in public-private contracting by analyzing: (1) the performance of Design-Build contracting compared to the traditional contracting-out in Oregon transportation infrastructure delivery, (2) the use of forward contracts and market transactions by U.S. investor-owned utilities in the wholesale market for power after divesting their generation assets due to electricity market restructuring and deregulation, and (3) the performance of Indonesia’s independent power producers which contracts were made under extractive political institutions promoted by the authoritarian Soeharto regime. I find that a consideration of transaction costs would lead to the efficient performance of the public-private contracting, however, under extractive political institutions, rent-seeking behavior would temper the transaction cost economizing motive of public-private contracting.
Three main takeaways suggested from the analysis of the three cases. First, institutions affect the performance of public-private contracting not only concerning the transaction costs related to the contracting but also through the rent-seeking behavior that underlies the contracting. Second, the private sector’s voluntary action in choosing the best governance structures to meet its transaction cost minimization objective impacts to the performance of public-private contracting. Third, in an authoritarian government, decision making on the choice of governance structure can be made by the state exercising its despotic power; thus, the promise of efficiency in public-private contracting was undermined when personal and political interests override economic and social objectives. I conclude that public-private contracting remains a profound and essential way of delivering public goods and services when the transaction cost economizing motive prevails.