Transaction costs in the context of the requirements of effective finance management for local government units

Motivation: Transaction costs economics fits in the paradigm of the new institutional economy, in which the costs are treated as a versatile measure for the effectiveness of institutions. Transaction costs are generated in every field of human activity, because we live ‘in the world of contracts’. Characteristics of transaction costs include: common unawareness of their existence, difficulties in quantification and omission in economic calculation. This pertains especially to the public sector and the corresponding public transaction costs. In modern public finance system, costs rise at a dynamic rate, thus having a significant effect on government budget, as well as on the effectiveness of the public sector.Aim: The purpose of this paper is to identify and indicate the specificity of public transaction costs for local government sub-sector, as an integral component of public finance sector. The intent of the author is to expose the threads of local governance and public sector within the theory of transaction costs economy, as well as to prove that inclusion of those costs in economic calculations related to local finance system is the necessary condition for effective management of self-government finance.Results: The theoretical achievements of transaction costs economy focuse mainly on market transactions (market transaction costs) and managerial relations (managerial transaction costs), usually marginalizing the thread of public transaction costs occurring in the field of the institutional environment related to the process of making public choices/political decisions and providing of public goods. The highest transaction costs of self-government sub-sector are associated with two levels of its activity. First, contracts concluded at the public entity — public entity level, and second, contracts concluded at the public entity — private entities level. In the first case, it is about transaction costs related to the structure of public institutions, generated as an effect of fiscal relations among individual levels of public authority (transaction costs of intergovernmental relations). The second case is associated with the progressing marketization of relations within the public sector, and the transaction costs associated with the process pertain among others to: the method of provision of local public goods (including consolidation of the entities rendering those services), tender procedures, the public-private partnership, privatization processes of municipal companies, municipal outsourcing, etc.