Working Paper: NBER ID: w3395
Authors: 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.
Keywords: externalities; incentives; economic reforms; public decision makers; market-oriented reforms
JEL Codes: E6; H4; H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| multiple public decision-makers (D70) | negative externalities (overspending, undertaxing, overborrowing, overinflation) (D62) |
| external financing (G32) | weakened incentives for adjustment (H31) |
| conditional external financing (G32) | institutional reform outcomes (O17) |
| credible fiscal leadership (E62) | reduced tax uncertainty (H29) |
| tax uncertainty (H26) | reduced present effort (D29) |
| tax uncertainty (H26) | economic performance (P17) |