Externalities. Incentives, and Economic Reforms

International Monetary Fund

No 1990/010, IMF Working Papers from International Monetary Fund

Abstract: The paper emphasizes the role of institutions and incentives in the presence of externalities. An economy with multiple public decision makers is likely to experience “overspending,” “undertaxing,” “overborrowing,” and “overinflation” unless effective institutions exist for overcoming coordination failure. External financing may weaken incentives for adjustment over the longer run unless assistance is made conditional on fundamental institutional reforms. The paper also analyzes reforms that strengthen incentives to provide effort. Uncertainty regarding future taxes reduces present effort and the responsiveness of output to market signals. In addition, the paper addresses the adverse effects of bank insurance and soft budget constraints.

Keywords: WP; effort E; inflation externality; inflation process; lump sum; investment project; banking system; utility function; marginal utility; adverse selection; rate of inflation; interest rate; spending level; enterprise manager; Insurance; Personal income; Inflation; Budget planning and preparation (search for similar items in EconPapers)
Pages: 40
Date: 1990-01-01
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