Incentive Mechanisms Surrounding International Financial Institutions
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.
Disclaimer: The Asian Development Bank (ADB) recognizes its members by their official designations as indicated in https://www.adb.org/who-we-are/about. By making Asian Development Review articles available in this online archive, ADB does not intend to make any judgments as to the legal or other status of any territory or area. The views expressed in this content are those of the authors and do not necessarily reflect those of ADB.
He is very much indebted to Avinash Dixit, Henry Hansmann, M. G. Quibria, Susan Rose-Ackerman, T. N. Srinivasan, Naoto Yamauchi, and Noriyuki Yanagawa for valuable discussions and comments. The Appendix contains a part of research theoretical results of the author’s joint research with Hideshi Itoh. These comments concerned such a wide range of issues that they could only be partially accommodated. An earlier version of this paper was presented as a lecture in the Distinguished Speaker Series of the Asian Development Bank, October 1998.
