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

September 1, 2006

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Format: Chicago

Luc E. Leruth, and Elisabeth Paul. A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries, (USA: International Monetary Fund, 2006) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Auditing, Expenditure, External audit, Internal controls, Tax incentives

Keywords: Agency cost, Optimal contract, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/204
Stock No:

WPIEA2006204
ISBN:

9781451864649
ISSN:

1018-5941

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