Pay for performance risks discouraging motivated employees

They dislike the effort needed for measuring performance; some change jobs, even at a pay cut, write Antonio Cordella and Tito Cordell

To give or to forgive ? aid versus debt relief

Is generalized debt relief an effective development strategy, or should assistance be tailored to countries'characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.Debt Markets,External Debt,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Access to Finance

Limits of Conditionality in Poverty Reduction Programs

When donors and recipients have different preferences over budgetary allocations, conditionality helps the implementation of donor-financed poverty reduction programs. If donors cannot perfectly monitor all recipients' actions, however, conditionality entails an inefficient allocation of resources. Under such conditions, the optimal amount of conditionality varies (often not monotonically) with the recipients' degree of social commitment. Finally, if recipients' preferences are not observable, conditionality can be used to prevent recipients with a weak commitment to poverty reduction from obtaining aid funds. This may, however, lead to further distortions in terms of resource allocation and to phenomena of “aid rationing.” Copyright 2002, International Monetary Fund

Country Insurance

In this paper, we examine how country insurance schemes affect policymakers' incentives to undertake reforms. Such schemes (especially when made contingent on negative external shocks) are more likely to foster than to delay reform in crisis-prone volatile economies. The consequences of country insurance, however, hinge on the nature of the reforms being considered: "buffering" reforms, aimed at mitigating the cost of crises, could be partially substituted for, and ultimately discouraged by, insurance. By contrast, "enhancing" reforms that pay more generously in the absence of a crisis are likely to be promoted. Copyright 2005, International Monetary Fund

CATalytic insurance : the case of natural disasters

Why should countries buy expensive catastrophe insurance? Abstracting from risk aversion or hedging motives, this paper shows that catastrophe insurance may have a catalytic role on external finance. Such effect is particularly strong in those middle-income countries that face financial constraints when hit by a shock or in its anticipation. Insurance makes defaults less appealing, relaxes countries'borrowing constraint, increases their creditworthiness, and enhances their access to capital markets. Catastrophe lending facilities providing"cheap"reconstruction funds in the aftermath of a natural disaster weaken but do not eliminate the demand for insurance.Debt Markets,Bankruptcy and Resolution of Financial Distress,Labor Policies,Emerging Markets,Financial Intermediation

Country Insurance

The recent wave of financial crises has fueled the debate on the effect of IFIs intervention on governments' incentives to undertake reforms. In this paper we treat this intervention more generally as a country insurance contract, and examine its implications in a stylized set-up. More precisely, we identify the conditions under which the positive insurance effect dominates moral hazard considerations, and the channels through which this is achieved. In particular, we find that the case for country insurance is stronger for crisis-prone volatile economies, especially so if assistance is made contingent on the occurrence of adverse external macroeconomic shocks. Overall, our findings argue in favor of fairly-priced country insurance or insurance-type standing credit facilities that can be factored in ex ante by the borrowing government, as opposed to the customized discretionary bailoutsFinancial Crises, Bailouts, Moral Hazard, Insurance Effect,

Country Insurance

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. In this paper, we examine how the presence of country insurance schemes affects policymakers’ incentives to undertake reforms. Such schemes (especially when made contingent on negative external shocks) are more likely to foster than to delay reform in crisis-prone volatile economies. The consequences of country insurance, however, hinge on the nature of the reforms being considered: “buffering” reforms, aimed at mitigating the cost of crises, could be partially substituted for, and ultimately discouraged by, insurance. By contrast, “enhancing” reforms that pay off more generously in the absence of a crisis are likely to be promoted.

Motivations, monitoring technologies, and pay for performance

Monitoring technologies and pay for performance (PFP) contracts are becoming popular solutions to improve public services delivery. Their track record is however mixed. To show why this may be the case, this paper develops a principal agent model where agents’ motivations vary and so the effectiveness of monitoring technologies. In such a set-up, it shows that: (i) monitoring technologies should be introduced only if agents’ motivations are poor; (ii) optimal PFP contracts are non-linear/non-monotonic in agents’ motivations and monitoring effectiveness; (iii) investments aimed at improving agents’ motivations and monitoring quality are substitutes when agents are motivated, complements otherwise; (iv) if the agents’ “type” is private information, the more and less motivated agents could be separated through a menu of PFP/non-PFP contracts, designed in a way that only the less motivated ones choose the PFP

Minimum price variations, time priority and quotes dynamics

We analyze the impact of a minimum price variation (tick) and time priority on the dynamics of quotes and the trading costs when competition for the order flow is dynamic. We find that convergence to competitive outcomes can take time and that the speed of convergence is influenced by the tick size, the priority rule and the characteristics of the order arrival process. We show also that a zero minimum price variation is never optimal when competition for the order flow is dynamic. We compare the trading outcomes with and without time priority. Time priority is shown to guarantee that uncompetitive spreads cannot be sustained over time. However it can sometimes result in higher trading costs. Empirical implications are proposed. In particular, we relate the size of the trading costs to the frequency of new offers and the dynamics of the inside spread to the state of the book.Market--microstructure, tick size, time priority, quotes formation, trading costs

Do procurement rules impact infrastructure investment efficiency ? an empirical analysis of inversao das fases in Sao Paulo state

As a means to reduce delays in public works implementation, a number of Brazilian states have recently reformed their procurement rules allowing contractor price proposals to be assessed before the technical evaluation of submitted bids is undertaken (in a procedure known as inversao das fases). In order to evaluate the effects of such reform, this paper adopts a difference-in-differences methodology to compare the procurement performance of Sao Paulo state (a reformer state) and Minas Gerais'(a non-reformer state) largest water and sewage utility along three efficiency dimensions: (i) procurement process duration; (ii) likelihood of complaint resolution litigation; and (iii) prices paid to contractors. The analysis finds that the reform is associated with a 24 day reduction in the duration of procurement processes for large projects and a 7 percentage point drop in the likelihood of court challenges irrespective of project size. Although both effects are economically important, only the latter is statistical significant. Finally, the paper finds no evidence of an effect of the procurement reform on prices paid.Government Procurement,E-Business,Public Sector Corruption&Anticorruption Measures,Contract Law,Investment and Investment Climate