Coordinating development: Can income-based incentive schemes eliminate Pareto inferior equilibria?
AbstractIndividualsâ inability to coordinate investment may significantly constrain economic development. In this paper we study a simple investment game characterized by multiple equilibria and ask whether an income-based incentive scheme can uniquely implement the high investment outcome. A general property of this game is the presence of a crossover investment point at which an individualâs incomes from investment and non-investment are equal. We show that arbitrarily small errors in the governmentâs knowledge of this crossover point can prevent unique implementation of the high investment outcome. We conclude that informational requirements are likely to severely limit a governmentâs ability to use income-based incentive schemes as a coordination device.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Development Economics.
Volume (Year): 83 (2007)
Issue (Month): 2 (July)
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Web page: http://www.elsevier.com/locate/devec
Other versions of this item:
- Philip Bond & Rohini Pande, 2005. "Coordinating Development: Can Income-based Incentive Schemes Eliminate Pareto Inferior Equilibria?," Working Papers 924, Economic Growth Center, Yale University.
- O21 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Planning Models; Planning Policy
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
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