Transaction costs, institutional design and the separation of powers

The internal organization of the government can be used as a constraint on the capture of political decision makers in a setting where multiple interest groups try to influence policy outcomes. Centralization, i.e., the choice of a single agency dealing with all interest groups is costly because it induces a better coordination of their influences. The choice of specialized agencies is better because it increases the overall transaction costs of capture, making agencies more immune to capture by interest groups. More generally, we discuss how an institutional design relying on separation of powers among specialized agencies may improve policy outcomes. (C) 1998 Elsevier Science B.V. All rights reserved.