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Mr. James M. Boughton and Mr. Alex Mourmouras
IMF lending is generally conditional on specified policies and outcomes. These conditions usually are negotiated compromises between policies initially favored by the Fund and by the country's authorities. In some cases the authorities might be satisfied enough with the outcome to take responsibility for it ("own" it) even though it was not their original preference. In other cases, they might accept the outcome only to obtain financing, in which case weak commitment might lead to poor implementation. This paper reviews the theoretical basis for the importance of ownership, summarizes what is known about its empirical effects, and suggests a strategy for strengthening it.
Mr. Wolfgang Mayer and Mr. Alex Mourmouras
Improving the effectiveness of financial assistance programs is a priority of international financial institutions (IFIs). This paper examines the effectiveness of alternative assistance instruments in a dynamic political economy framework. Economic policies of the receiving country are distorted by the influence of a domestic interest group. The assistance-providing IFI aims at reducing these distortions. The IFI provides assistance either as grants or loans, and either conditionally on reducing policy distortions or unconditionally. The paper shows that, other things constant, one-time grants are more effective than loan rollovers when assistance is unconditional, but that the opposite is true when assistance is conditional.
Mr. James M. Boughton and Mr. Alex Mourmouras

Front Matter Page Policy Development and Review Department Contents I. Introduction II. Ownership and Economic Welfare A. Common Agency Models B. State Capture C. Adaptation or Confrontation? III. Ownership and Conditionality: Empirical Evidence IV. An Action Plan for Strengthening Ownership References Annex Figure 1. Equilibrium with Conditional and Unconditional IFI Assistance

Mr. Wolfgang Mayer and Mr. Alex Mourmouras

Front Matter Page IMF Institute Authorized for distribution by Eric V. Clifton Contents I. Introduction II. The Common–Agency Model A. Decision Makers and Their Objectives B. Political Equilibrium with Unconditional Assistance C. Political Equilibrium with Conditional Assistance III. Instruments of Assistance: Loan Rollovers Versus a Final Grant IV. Unconditional Assistance: The IFI Should Use a Grant A. Unconditional Loan Decisions B. Unconditional Grant Decisions V. Conditional Assistance: The IFI Should Use Loans A

Mr. Wolfgang Mayer and Mr. Alex Mourmouras
International financial assistance (loans and grants) can potentially raise recipients' welfare in two ways, by affecting a direct resource transfer and by facilitating efficiency-enhancing reforms. In practice, barriers to reform limit the potential of assistance to deliver these two dividends. In this paper, we analyze assistance programs designed to ensure that recipient governments voluntarily adopt reforms and overcome barriers associated with: (i) the reaction of special interests to the prospect of reform; (ii) the possibility of default and political instability in the recipient country; and (iii) adverse selection and moral hazard. Reform barriers raise the cost of incentive-compatible assistance and may result either in no assistance being forthcoming or assistance that ensures repayment but not the implementation of reforms. Critical to the choice of assistance programs is the size of the rent accruing to special interests in the absence of reform and the limited liability rents needed to ensure that repayment terms do not threaten the country's political stability. Optimal assistance contracts feature flexible repayment terms related to real economic growth in recipient countries.
Mr. Wolfgang Mayer and Mr. Alex Mourmouras

Investment Policies , ed. by D. Mitra and A. Panagariya ( Amsterdam : North Holland ), pp. 249 – 76 . Mayer W. and A. Mourmouras , 2005 , “ The Political Economy of IMF Conditionality: A Common Agency Model ,” Review of Development Economics , Vol. 9 , No. 4 , pp. 449 – 66 . Mayer W. and A. Mourmouras , 2007 , “ On the Viability of Conditional Assistance Programs ,” forthcoming in Trade, Globalization and Poverty , ed. by. E. Dinopoulos , P. Krishna , A. Panagariya , and K. Wong ( New York : Routledge

Mr. Muthukumara Mani and Mr. Per G. Fredriksson

CIESIN et al. (2001) . This index applies to environmental regulations in place in the late 1990s, and thus makes it possible to test our theory’s predictions on recent data. Our theory builds on Grossman and Helpman’s (1994) model of trade policy determination, developed from Bernheim and Whinston’s (1986) common agency model. This model has previously been extended to environmental policymaking by, for example, Aidt (1998) and Damania (2001) . In our model, a lobby group representing the industry aims to influence the incumbent government’s environmental

Mr. Muthukumara Mani and Mr. Per G. Fredriksson
We develop and test a theory of the rule of law and environmental policy formation. In our model an increase in the degree of rule of law has two opposing partial effects on environmental policy: first, a greater share of policy decisions are implemented according to law; second, industry bribery efforts increase because more is at stake. Moreover, we find that an increase in corruptibility of policymakers lowers the stringency of environmental policy. The empirical findings suggest that a greater degree of rule of law raises environmental policy stringency, but the effect is lower where corruptibility is high.
Mr. Muthukumara Mani and Mr. Per G. Fredriksson

samples of countries by the World Bank (see Kaufmann, Kray, and Zoido-Lobaton, 1999a , 1999b ) and CIESIN and others (2001) , respectively, making it feasible to test the implications of the model. The theory builds on the common agency model by Grossman and Helpman (1994) , developed from Bernheim and Whinston (1986) . To our knowledge, the effect of the rule of law has not been studied using this model. 7 The model has a policymaking government and an industry lobby group. Environmental (pollution) tax policy is assumed to be made up by a large number of small

Mr. Muthukumara Mani and Mr. Per G. Fredriksson
This paper seeks to contribute to the unresolved issue of the effect of economic integration on environmental policy. In particular, we discuss the joint impact of trade openness and political uncertainty. Our theory predicts that the effect of trade integreation on the environment is conditional on the degree of political uncertainty. Trade integration raises the stringency of environmental policies, but the effect is reduced when the degree of political uncertainty is great. Political uncertainty has a positive effect on environmental policy as it reduces lobbying efforts. Applying our model to a unique data set of primarily developing countries, the empirical findings support the theory and are robust under alterntive specifications.