The sugar industry remains a priority for development in the Indonesian agricultural sector, especially in East Java. However, the performance of the sugar industry in East Java during the two last decades has declined, which is shown in the decreasing volume of production. This study utilized the analysis of institutional arrangements to identify the problems of the sugar industry in East Java – Indonesia. It as assumed that the institutional arrangements in the sugar industry cause high transaction costs. This research compares the transaction costs between state-owned and privately-owned sugar mills and contract and non-contract sugarcane farmers.