A Framework for Efficient Government Investment
IMF Working Papers, February 28, 2013
Source details
- Canonical URL
- A Framework for Efficient Government Investment
Other formats
Bibliographic details
- Authors: Andrew M. Warner
- Published: February 28, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475579147.001
Central argument and conceptual framework
- The familiar justification for state intervention: when spending provides public goods or corrects externalities, provided the social return is above a threshold.
- Additional consideration introduced: whether, despite externalities, the private sector has an incentive to undertake the activity.
- Combined criteria (externality presence + private-sector incentive) define a modified, more efficient framework for justifying state intervention.
- Under this modified framework, a benign state focused on social welfare:
- Would not address every externality.
- Would not necessarily select expenditures with the highest social returns.
Analytical approach and tools
- The paper summarizes these points in a graph that:
- Illustrates the joint role of externalities and private-sector incentives in guiding state intervention.
- Is then used to analyze policy rules, subsidies, and state–private sector interaction.
- Emphasis on cost-benefit analysis and assessing return profiles to guide expenditure choices.
Key findings
- State intervention should be guided by both:
- The presence and magnitude of externalities/public goods considerations.
- The existence (or absence) of private-sector incentives to undertake the activity despite those externalities.
- Subsidies and policy rules must be evaluated in light of how they alter private incentives, not only social returns.
- A framework that ignores private-sector incentives risks inefficient use of public funds even when social returns are high.
Policy recommendations and implications
- Design subsidies and policy rules to account for the private-sector incentive structure so that public spending economizes without losing effectiveness.
- Do not assume that every externality warrants direct state provision; prioritize interventions where private incentives are weak and social returns justify state action.
- Collect and act on information about:
- Social return magnitudes.
- Private-sector incentive structures.
- How policy instruments affect private participation and outcomes.
Practical guidance on information needs
- Data and analysis should focus on:
- Investment return profiles (social and private).
- Scope and performance of government relative to market responses.
- Cost-benefit assessments that explicitly model private-sector participation probabilities and incentive effects.
Andrew M. Warner, "A Framework for Efficient Government Investment", IMF Working Papers 2013, 058 (February 28, 2013); Pages: 22; Volume: 2013; Issue: 058; DOI: https://doi.org/10.5089/9781475579147.001; ISBN: 9781475579147; ISSN: 1018-5941.
Content in this bundle
- PDP-Working Paper