Programme budgeting and marginal analysis (PBMA) is increasingly being used as a method of priority setting in the health care sector. Despite this, PBMA has, on occasions, been subject to problems in its application which can be seen as being 'institutional' in nature. This paper examines the extent to which the institutional setting of PBMA affects the way in which it can be conducted. In particular, a transactions costs perspective is taken to analyse the extent to which variation in such costs can alter the incentives of the individual participants. A number of recommendations for improving the sustainability of such projects is then provided. Following this, the implications which this 'institutional' approach has for the evaluation of PBMA are set out.