Outcomes-Based Conditionality: Its Role and Optimal Design

Outcomes-Based Conditionality: Its Role and Optimal Design
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23
By:"Anna Ivanova"
"Conditionality (International relations)"
Published on 2006-05-01 by International Monetary Fund

domestic \u003cb\u003elobbies\u003c/b\u003e, and unobservability may weaken the IMF's competitive power. \u003cbr\u003e\nIn some cases, however, the IMF may find it optimal to incur additional costs in \u003cbr\u003e\norder to induce sound economic policies. The model makes a surprising \u003cbr\u003e\nprediction ...

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The paper employs a principal-agent framework to analyze the role and design of outcomesbased conditionality in the presence of market frictions and domestic opposition. The results suggest that outcomes-based conditionality is a good option for the IMF when opposition to reforms is relatively weak and when the IMF loan is unsubsidized. The only role conditionality ends up playing in this case is that of an efficiency tool. The benefits of outcomes-based conditionality in the presence of strong opposition are less clear, and using this conditionality as an incentive tool would require that IMF financing be subsidized.

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