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Creating incentives for reform

Editor's Note: David Kaplan is a PSD Specialist in the Enterprise Analysis Unit of the World Bank Group.

I had a great chat with Simon Corden, who stopped by my office in Washington, DC to talk about regulatory barriers. Simon is a consultant to the OECD, and one of the things he is interested in is reducing barriers to entry. He is focusing on Mexico right now, but also has experience in Australia. The Australian reform experience is a fascinating case of linking incentives and rewards.

There is considerable evidence that reducing entry barriers increases firm entry. In Australia, like many countries, state and local governments impose many of the regulatory barriers to entry. So why wouldn’t these state and local governments want to reform?

Part of the answer is that most of the additional tax revenue due to increased entry will go to the federal government. For this reason, the Australian federal government agreed to compensate state governments if they would reduce regulatory barriers. The plan seems to have worked.

I wonder if there are more cases in which incentive alignment might lead to reform?


Submitted by Mohammad Amin on
As the story suggests, alignment of interests is an important yet a neglected issue at the sub-national level. At the same time, international agreements are unthinkable without mutual gain for all - that is, alignment of incentives of nations is a pre-condition for all international agreements. A classic example of this is the GATT/WTO. Bagwell and Staiger (American Economic Review, March 1999) show that the basic pillars of GATT/WTO - Reciprocity and MFN (Most Favored Nation clause) - were specifically designed to ensure that the interests of member countries were sufficiently aligned to promote trade reforms (lower trade barriers). Why we tend to think differently at the interantional and sub-national levels is something worth exploring.

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