High-powered incentives and communication failure

Abstract

This paper uses a donor–provider–agent framework to study the role of provider incentives for the delivery of developmental goods like aid, credit, or technology transfer to the poor. It considers a situation where credible communication by the provider is the key to successful delivery. The study focuses on the interplay between incentives and communications and shows that the use of high-powered incentives can lead to breakdown of communication between providers and agents, leading to undesirable outcomes. However, in many situations motivated providers or state-contingent contracts can be used to achieve the second best outcome.