Creating incentives for reform

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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?

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