Public choice theory is a branch of economics that developed from the study of taxation and public spending. It takes the same principles that economists use to analyze people's actions in the marketplace and applies them to people's actions in collective decision making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest.

Transaction costs are expenses incurred when buying or selling securities. Transaction costs include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price the buyer pays). The transaction costs to buyers and sellers are the payments that banks and brokers receive for their roles in these transactions.

Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals (such as shareholders) and agents of the principals (for example, company executives). Principals commonly delegate decision-making authority to the agents. Agency problems can arise because of inefficiencies and incomplete information. In finance, two important agency relationships are those between stockholders and managers, and stockholders and creditors.

Public Choice theory if considered in Public Administration or Government.

What would it mean, Decision makers (Government) are self interested, so they will take decisions that are beneficial to them? only?

Where would public stand?

OR Does Public Choice theory mean that Governments or Public Administrators decisions are influenced or driven by general public's choices or wishes?

Each political group presents its government platform for public management. The choice of voters is known as public choice. It is the choice of certain individuals in society (majority rule). These objects are and stand behind the ideas selected to manage (to governance the society).

The principal theoretical bases for the new management reforms are public choice theory, principal–agent theory and transaction cost economics

Public Choice Theory

The central tenet of public choice theory is that man is a rational being, acting or desiring to act autonomously, and seeking to satisfy his personal best interest. In public administration terms, this would mean that services have to be targeted or varied (choice), and that the taxpayer would demand value for his money (‘more for less’) and accountability. One of the thrusts of this theory is that the uniform treatment of the citizenry has led to an ever widening bureaucracy as government tries to do everything. Further, adherents of this theory criticise the poor reward system of the public service, which promotes ineffective performance, giving rise to ‘waste of resources and an in-built tendency for expenditure to grow and for delivery to take precedence over productivity’. Since there have been inadequate discipline and control or accountability mechanisms, ‘government agencies oversupply collective goods because of budget maximization behaviour’. The reform needs were, therefore, diagnosed as the need for efficiency and efficacy, with an automatic discipline mechanism – the market – just like in business. The solution was, consequently, the adoption of business-sector management processes in the public arena.

Transaction Cost Economics

This theory attempts to take care of the need to do more with less of public resources, especially budget allocations. Central to the theory is that alternative methods, and attendant costs, for carrying out projects or delivery of services are examined for their merits, usually judged by the cost. The question of efficiency is still the crux here. It is easy to understand, then, that this comparison examines not only the total project cost, but also every stage of it – planning, adapting, and the evaluation of the finished task under each of the options.

A key issue taken up in the literature is the merits of proceeding through the market – open competition, or in-house execution of the project. Transaction cost economics, therefore, examines also the opportunity costs, i.e. the cost of not using the alternative.

The transaction cost theory as been described as ‘a rich, sophisticated, and influential attempt to link imaginative forms of economic analysis with other disciplines, such as contract law and organisation theory’. The need for such linkage would be to ensure, as much as possible, that all factors are examined and that the choice made represents the best possible option. Two types of transaction costs should be considered: ex ante and ex post. They define ex ante transaction costs as those arising from efforts made to hinder transaction failures arising from asset specificity or opportunism. Ex ante costs also include the costs of drafting, negotiating and safeguarding a contract. On the other hand, the authors describe ex post transaction costs as those incurred to make adjustments to contracts or bonding to ensure that contractual obligations are met. The safeguards against opportunism and contract abandonment arise from the assumption within the transaction cost theory, that ‘man’s natural state is opportunism rather than trust’.

Principal–Agent Theory

Agency theory, or ‘agencification’, explains the reform method within the government that is ‘designed to create, within the public sector, autonomous or semi-autonomous organisations in which the implementation function is separated from the policy-making function’. Simply put, agencificaton is the separation of the provider and user of public services. Basically, the recipients of public services are the government (which usually also provides them) and the public. The intention of agencification is to demarcate the two roles.

This is done by creating a contractual relationship between the two parties, the principal and the agent. The principal is the party requiring a service or goods, and the agent is the party supplying the service or goods. The principal pays the agent. The agent is expected (or is assumed) to have expertise and to be able, hopefully, to provide the service at a price lower than it would cost if the principal were to provide it personally. In the public sector, the government – at any level – becomes the principal contracting to buy public services from the agent. The agent could be an external body or a semi-autonomous organ that is part of the public sector.

In Britain, the Thatcher government, out of fear of the reaction of labour unions, retained the agencies as part of the government; whereas in Japan, Independent Administration Institutions were established to execute the policies. Most often, anyway, it is a combination of the two options.

The relationship between the principal and the agent is usually rooted in a contract. Such a contract could be implicit, obligational or relational, depending on how much mutual trust exists between the parties. The aim of the principal–agent theory would thus be to provide an intellectual and legal framework for working out ‘the most satisfactory way of negotiating, specifying, and monitoring contracts so as to minimise the likelihood of violations resulting from opportunism on the part of the agent (e.g. due to shirking, deception, cheating and collusion)’. As is the usual nature of contractual relationships, rewards accrue to the agent, but there may also be penalties for breach of contract. Since the principal may not have all the information necessary to make the best selection, safeguards may be taken in the form of bonding or the stipulation of penalties for non-performance.

Thank you...contracting literature low in categorical service systems which have closed contracting NGOs in disability.

TCT, (Transaction cost theory) broadly speaking, aims at answering the question of what kind of governance structure should be chosen in a particular environmental set in order to optimize economic actions. The two alternative models of governance are taken into account: the firm with its hierarchy system and the market with its price mechanism.However, the most interesting part, at least for  the authors of this  article, is the so called ’’„swallen middle” – hybrid relations, where the features of both price mechanism and hierarchy system are mixed.

Each model (internal hierarchy, market or hybrid solution) can be chosen by an entity to manage any of its transactions, and the choice of this particular governance structure is the result of an assessment of certain traits in the environment and the nature of economic action. Choosing a model for governing transactions generates a different set of the intra- and inter- organisational relations. The basis for such an analysis is an adequate estimation of the value of a given operation subject to a prospective contract, cooperation or pooling. According to the newest body of knowledge in TCT field, cost calculation should be done using the value chain approach, which views value not in accounting terms but in terms of strategic importance of the operation for the entity and/or  the end user of a product or service.The result of this calculation is the certain model of governance with its typical relations:

- when the hierarchy is chosen, one has to bear with the internal coordination costs and provide the set of managing rules which will minimize shirking,

- when the market transactions are chosen, relations between the partners are highly formalised by contract rules,

- when the results of calculation opt for hybrid solutions then the contract between the partners is a rather loose set of contract rules accompanied by a mixture of certain managing and coordinating tools.

I hope it will help, regards

Beata

Thank You all for your answers and valuable contributions 

https://www.researchgate.net/publication/287162366_Transaction_Banking_Services_The_Case_of_Bangladesh

Book Transaction Banking Services: The Case of Bangladesh