Political Transaction Costs and the Politics of Administrative Design

We propose a political transaction cost theory of the politics of administrative design and then evaluate the theory using data on the initial design attributes of 141 federal administrative agencies created legislatively between 1879 and 1988. The theory posits that the enacting coalition attempts to strategically manipulate administrative design attributes and therefore political transaction costs for future coalitions seeking to affect agency policy. Based on perceptions of the probability of political holdup and resulting losses, the enacting coalition alters political transaction costs to optimize expected benefits. We gauge the perceived probability of political holdup using measures of executive-legislative conflict, coalitional conflict, electoral turnover, and party hegemony. Using structural probit analysis, the results show that these factors significantly affect agency design attributes involving structure, process, and monitoring. Thus, the statistical analysis is consistent with the theory that the enacting coalition manipulates political transaction costs in designing U.S. administrative agencies.