A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries

45 Pages Posted: 3 Oct 2006

See all articles by Luc Leruth

Luc Leruth

International Monetary Fund (IMF)

Elisabeth Paul

Université de Liege

Date Written: September 2006

Abstract

A well-functioning public expenditure management (PEM) system is considered a critical pillar of government efficiency, on par with a low-distortion tax system and efficient tax administration. The paper discusses PEM systems in developing countries using an analytical framework based on principal-agent theory. This simple model can be applied to various PEM systems, and allows for comparisons between institutional settings. To illustrate this, we analyze the benefits derived from the use by the Ministry of Finance (MoF) of two control instruments; ex post audits and ex ante controls, and assess their value in terms of their ability to deter cheating. We derive a set of possible "control regimes" which can be used by the MoF. Although we illustrate the use of the model using developing countries, it is also relevant to developed economies.

Keywords: public expenditure management, principal-agent theory, developing countries

JEL Classification: D73, D86, H11, H50, O12

Suggested Citation

Leruth, Luc and Paul, Elisabeth, A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries (September 2006). IMF Working Paper, Vol. , pp. 1-45, 2006. Available at SSRN: https://ssrn.com/abstract=934463

Luc Leruth (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Elisabeth Paul

Université de Liege ( email )

Place des Orateurs 3, Batiment 31
Sart-Tilman
B-4000 Liege, 4000
Belgium
+32 4 3662872 (Phone)
+32 4 3664751 (Fax)

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