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Externalities, Incentives, and Economic Reforms

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  • Joshua Aizenman
  • Peter Isard

Abstract

The paper emphasizes the role of institutions and incentives in the presence of externalities. An economy with multiple public decision makers is likely to experience "overspending," "undertaxing," "overborrowing," and "overinflation" unless effective institutions exist for overcoming coordination failure. External financing may weaken incentives for adjustment over the longer run unless assistance is made conditional on fundamental institutional reforms. The paper also analyses reforms that strengthen incentives to provide effort. Uncertainty regarding future taxes reduces present effort and the responsiveness of output to market signals. In addition, the paper addresses the adverse effects of bank insurance and soft budget constraints.

Suggested Citation

  • Joshua Aizenman & Peter Isard, 1990. "Externalities, Incentives, and Economic Reforms," NBER Working Papers 3395, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3395
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    References listed on IDEAS

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    1. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    2. Alessandra Casella and Jonathan Feinstein., 1988. "Management of a Common Currency," Economics Working Papers 8891, University of California at Berkeley.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. Aizenman, Joshua & Isard, Peter, 1993. "Externalities, incentives, and failure to achieve national objectives in decentralized economies," Journal of Development Economics, Elsevier, vol. 41(1), pages 95-114, June.

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