Financial Management Theory in the Public Sector

Financial Management Theory in the Public Sector

Financial Management Theory in the Public Sector

Financial Management Theory in the Public Sector


Integrating insights from economics, business, and political science, this book presents a multidisciplinary approach to the theory and practice of financial management in the public sector.


Public financial management lacks a coherent framework. To an extent, this is not at all unexpected given the diverse interests governments serve. Financial management decisions are needed in government to promote efficiency (such as lowest cost, highest return, positive net present value, etc.), as they do in the private sector. Achieving an efficiency goal, however, can be at variance or even in conflict with other policy goals, such as conducting affairs within a budget consensus, avoiding unnecessary risks, and complying with control systems and debt covenants.

Finance decisions also rest on human behavior, but choices are often colored by personal and institutional biases and imperfections. Furthermore, resources are limited, although the claims on those resources are endless. Yet, decisions must be made to preserve prescribed schedules.

Because the central premise for for-profit organizations is to increase owners' wealth, corporate financial management is more unified. Normative and predictive theories predominate. Corporate finance textbooks are thematically consistent. That is not to say that there are no competing theories and debates in that field. For public organizations, it is the latter, at least for now, that remains the principal focus.

This book contains 11 chapters, each focusing on a different theoretical approach to public financial management and each drawing heavily from recent developments in economics, business, and political science in order to provide a more contemporary view of the field and its theoretical underpinnings.

The first set of articles examines financial management from the ideals of human rationality and the explanation of deviations from the predictive model of expected utility maximization.

Information and certainty result in lower transaction costs and more efficient financial behavior. Building on the reality of financial transactions as the building blocks of financial management, John R. Bartle and Jun Ma find value in focusing on the contractual relationships involved in transactions, and . . .

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