There are over 300 public entities with a separate legal identity and substantial autonomy from the central government in Korea. For several decades there have been fundamental conceptual arguments within the Korean profession on the proper management systems on the distributed public entities. This paper argues on the concept of transaction costs in order to understand the organisational map of public sector. It is argued to be reasonable to expect that, over the long run, transaction cost-minimizing forms of organization will come to dominate in the government and public sector. As a powerful means to minimize the transaction costs on managing public entities, performance contracting and performance agreements between the government and public entities should be used more widely in Korea.