Agency and communication in IMF conditional lending: theory and empirical evidence

The combination of special interest politics (agency problems) and informational asymmetries presents serious problems as the implementation of conditionality is concerned. In this paper we focus on the role that the transmission of information between the IMF and the borrowing government has for the design of the most efficient "incentive contract." Specifically, we find that when agency problems are especially severe, and/or IMF information is very valuable, a centralized control is indeed optimal (conventional conditionality). To the contrary, when local knowledge is more important than the agency bias we expect delegation (ownership) to be the optimal incentive scheme. Controlling for economic and political factors, we find that the number of IMF conditions declines in countries with a greater social complexity and increases with the bias of the countries’ authorities and in more open and transparent countries, which is consistent with the theoretical results.