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

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Author Info
Elisabeth Paul
Luc Leruth
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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/204.

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Length: 43 pages
Date of creation: 22 Sep 2006
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Handle: RePEc:imf:imfwpa:06/204

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Keywords: Public expenditure management ; principal-agent theory ; developing countries ;

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  6. Bolton, Patrick, 1990. "Renegotiation and the dynamics of contract design," European Economic Review, Elsevier, vol. 34(2-3), pages 303-310, May. [Downloadable!] (restricted)
  7. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March. [Downloadable!] (restricted)
  8. Ian Lienert, 2003. "A Comparison Between Two Public Expenditure Management Systems in Africa," IMF Working Papers 03/2, International Monetary Fund. [Downloadable!]
  9. Gupta, Sanjeev & Verhoeven, Marijn, 2001. "The efficiency of government expenditure: experiences from Africa," Journal of Policy Modeling, Elsevier, vol. 23(4), pages 433-467, May. [Downloadable!] (restricted)
  10. Besley, Timothy & McLaren, John, 1993. "Taxes and Bribery: The Role of Wage Incentives," Economic Journal, Royal Economic Society, vol. 103(416), pages 119-41, January. [Downloadable!] (restricted)
  11. Yaya Moussa, 2004. "Public Expenditure Management in Francophone Africa: A Cross-Country Analysis," IMF Working Papers 04/42, International Monetary Fund.
  12. Dominique Bouley & J. Fournel & Luc Leruth, 2002. "How Do Treasury Systems Operate in Sub-Saharan Francophone Africa?," IMF Working Papers 02/58, International Monetary Fund.
  13. Jack Diamond, 2002. "The Role of Internal Audit in Government Financial Management: An International Perspective," IMF Working Papers 02/94, International Monetary Fund. [Downloadable!]
  14. Eskeland, Gunnar S. & Thiele, Henrik, 1999. "Corruption under moral hazard," Policy Research Working Paper Series 2204, The World Bank. [Downloadable!]
  15. Chand, Sheetal K. & Moene, Karl O., 1999. "Controlling Fiscal Corruption," World Development, Elsevier, vol. 27(7), pages 1129-1140, July. [Downloadable!] (restricted)
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  16. Strausz, Roland, 2006. "Timing of verification procedures: Monitoring versus auditing," Journal of Economic Behavior & Organization, Elsevier, vol. 59(1), pages 89-107, January. [Downloadable!] (restricted)
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  17. Ritva Reinikka & Jakob Svensson, 2004. "Local Capture: Evidence From a Central Government Transfer Program in Uganda," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 678-704, May. [Downloadable!] (restricted)
  18. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May. [Downloadable!] (restricted)
  19. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 1999. "The endogenous transaction costs of delegated auditing," European Economic Review, Elsevier, vol. 43(4-6), pages 1039-1048, April. [Downloadable!] (restricted)
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