Coordinating Development: Can Income-based Incentive Schemes Eliminate Pareto Inferior Equilibria?
AbstractIndividuals’ 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 individual’s incomes from investment and non-investment are equal. We show that arbitrarily small errors in the government’s 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 government’s ability to use income-based incentive schemes as a coordination device.
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Bibliographic InfoPaper provided by Economic Growth Center, Yale University in its series Working Papers with number 924.
Length: 37 pages
Date of creation: Oct 2005
Date of revision:
Coordination; Public Policy; Income Taxation; Implementation;
Other versions of this item:
- Bond, Philip & Pande, Rohini, 2007. "Coordinating development: Can income-based incentive schemes eliminate Pareto inferior equilibria?," Journal of Development Economics, Elsevier, vol. 83(2), pages 368-391, July.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-29 (All new papers)
- NEP-DEV-2005-10-29 (Development)
- NEP-PBE-2005-10-29 (Public Economics)
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