Incentive Mechanisms Surrounding International Financial Institutions

Koichi Hamada

Asian Development Review (ADR), 1998, vol. 16, issue 01, 126-148

Abstract: This paper applies the common agency framework and the theory of nonprofit organization to the functioning of international financial institutions (IFIs such as the IMF, IBRD, and ADB. Webs of intricate monitoring networks exist among member countries of an institution, its secretariat, and countries that receive financial support in exchange for conditionality. The paper will show, under the assumption of risk averse institutions and risk neutral members, that (i) the power of monitoring will be normally weakened if the IFI has an independent objective distinct from that of members; (ii) two or more IFIs will help the members unless external diseconomies exist among them; (iii) the free-rider problem of public goods can be resolved by conditionality but under a strict condition of perfect appropriability of surplus by principals, and (iv) if the IFI is situated between two risk neutral members like donor countries and recipient countries of IFI support, then the weakening of the power of monitoring disappears.

Date: 1998
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DOI: 10.1142/S0116110598000049

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