The Adding Up Problem: A Targeting Approach
This paper looks at the problem of making multiple lending decisions which affect the supply of the product when the consequences of these lending decisions are interrelated via the effect on the world price of the product. This is termed the 'adding up problem'. It is argued that thinking of this problem from the point of view of the targeting literature helps to clarify the nature of optimal policies. In order to do so, three factors need to be specified. First, the objective function of the lender (the Bank) as compared to those of the borrowers (the countries) must be clear. Second, the extent of the lenders' ability to influence total investment in the product, and the instruments available to it, must be understood. Third, distortions present in the environment must be identified. The lender is thought of as trying to implement policies that maximize its objective function. There are distortions in the system which prevent this objective function from being maximized automatically. These distortions could arise because (1) the objectives of the lender do not match those of the borrowers, (2) due to misconceptions of the borrowers on how the system works, (3) because of lack of access to funds on the part of the borrowers relative to the lender, among a host of other distortions not focused on here. The environment and policies available to the lender limit its ability to influence the outcome. In this context, targeting models can be used to help guide policy. The basic rule is to correct the distortions where they occur using the correct instrument to do so. If instruments are limited, the available instruments are used to target multiple distortions, and the first best need not be attainable.
|Date of creation:||Jan 1995|
|Date of revision:|
|Publication status:||published as Journal of International Trade and Economic Development, Vol.7, no.2(June 1998): 151-174.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Krishna, Kala & Thursby, Marie, 1992. "Optimal policies and marketing board objectives," Journal of Development Economics, Elsevier, vol. 38(1), pages 1-15, January.
- Kala Krishna & Marie Thursby, 1988.
"Optimal Policies with Strategic Distortions,"
NBER Working Papers
2527, National Bureau of Economic Research, Inc.
- Takamasa Akiyama, 1992. "Is there a case for an optimal export tax on perennial crops?," Policy Research Working Paper Series 854, The World Bank.
- Besley, T., 1992.
"Monopsony and Time-Consistency : Sustainable Pricing Policies for Perennial Grops,"
159, Princeton, Woodrow Wilson School - Development Studies.
- Besley, Timothy, 1997. "Monopsony and Time-Consistency: Sustainable Pricing Policies for Perennial Crops," Review of Development Economics, Wiley Blackwell, vol. 1(1), pages 57-70, February.
- Will Martin, 1993. "The Fallacy of Composition and Developing Country Exports of Manufactures," The World Economy, Wiley Blackwell, vol. 16(2), pages 159-172, 03.
- Tower, Edward, 1977. "Ranking the optimum tariff and the maximum revenue tariff," Journal of International Economics, Elsevier, vol. 7(1), pages 73-79, February.
- Akiyama, Takamasa & Larson, Donald F. & DEC, 1994. "The adding-up problem : strategies for primary commodity exports in sub-Saharan Africa," Policy Research Working Paper Series 1245, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4999. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.