Development Policy Lending, Conditionality, and Ownership: A Dynamic Agency Model Perspective

14 Pages Posted: 8 May 2006

See all articles by Alberto Paloni

Alberto Paloni

University of Glasgow - Department of Economics

Maurizio Zanardi

University of Surrey - School of Economics

Abstract

Is the World Bank's Development Policy Lending likely to enhance ownership and have greater effectiveness than structural adjustment? We specify a dynamic common agency model in which a government considering economic reform faces domestic opposition from interest groups. The dynamic specification, which is original in the context of policy reforms supported by the International Financial Institutions (IFIs), is essential to allow the strength of special interest groups to arise endogenously during the reform process. We show that conditionality may alter the country's political equilibrium and lead to higher social welfare. However, under certain circumstances which depend on country-specific circumstances, conditional assistance could lead to lower social welfare. Thus, for conditionality not to be inconsistent with ownership, its design must be appropriate to the country circumstances and directly affect the domestic political constraint.

Suggested Citation

Paloni, Alberto and Zanardi, Maurizio, Development Policy Lending, Conditionality, and Ownership: A Dynamic Agency Model Perspective. Review of Development Economics, Vol. 10, No. 2, pp. 253-266, May 2006, Available at SSRN: https://ssrn.com/abstract=898040 or http://dx.doi.org/10.1111/j.1467-9361.2006.00316.x

Alberto Paloni (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Maurizio Zanardi

University of Surrey - School of Economics ( email )

Guildford, Surrey GU2 7XH
United Kingdom

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