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

  • Luc E. Leruth
  • Elisabeth Paul
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    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
    Date of creation: 01 Sep 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/204
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    1. 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.
    2. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
    3. 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.
    4. Strausz, Roland, 2006. "Timing of verification procedures: Monitoring versus auditing," Journal of Economic Behavior & Organization, Elsevier, vol. 59(1), pages 89-107, January.
    5. Ian Lienert, 2003. "A Comparison Between Two Public Expenditure Management Systems in Africa," OECD Journal on Budgeting, OECD Publishing, vol. 3(3), pages 35-66.
    6. Kessler, Anke S., 2000. "On Monitoring and Collusion in Hierarchies," Journal of Economic Theory, Elsevier, vol. 91(2), pages 280-291, April.
    7. Ian Lienert, 2003. "A Comparison Between Two Public Expenditure Management Systems in Africa," IMF Working Papers 03/2, International Monetary Fund.
    8. Laffont, Jean-Jacques & Rochet, Jean-Charles, 1997. " Collusion in Organizations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 485-95, December.
    9. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
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    13. Yaya Moussa, 2004. "Public Expenditure Management in Francophone Africa; A Cross-Country Analysis," IMF Working Papers 04/42, International Monetary Fund.
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    15. 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.
    16. Luc E. Leruth & Dominique Bouley & J. Fournel, 2002. "How Do Treasury Systems Operate in Sub-Saharan Francophone Africa?," IMF Working Papers 02/58, International Monetary Fund.
    17. Chand, Sheetal K. & Moene, Karl O., 1999. "Controlling Fiscal Corruption," World Development, Elsevier, vol. 27(7), pages 1129-1140, July.
    18. Dia, M., 1993. "A Governance Approach to Civil Service Reform in Sub- Saharan Africa," Papers 225, World Bank - Technical Papers.
    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.
    20. D. Bouley & J. Fournel & Luc Leruth, 2002. "How do treasury systems operate in sub-Saharan francophone Africa?," OECD Journal on Budgeting, OECD Publishing, vol. 2(4), pages 49-83.
    21. Eskeland, Gunnar S. & Thiele, Henrik, 1999. "Corruption under moral hazard," Policy Research Working Paper Series 2204, The World Bank.
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