Coordinating Development: Can Income-based Incentive Schemes Eliminate Pareto Inferior Equilibria?

Bond, Philipe; Pande, Rohini (2007)


Bond, Philipe, and Rohini Pande. 2007. “Coordinating Development: Can Income-Based Incentive Schemes Eliminate Pareto Inferior Equilibria?”. Journal Of Development Economics 83 (2): 368-391.
Individuals' inability to coordinate investment may significantly constrain economic development. In this paper we study a simple investment game characterized by multiple equilibria and ask whether an income-based incentive scheme can uniquely implement the high-investment outcome. A general property of this game is the presence of a crossover-investment point at which an individual's incomes from investment and non-investment are equal. We show that arbitrarily small errors in the government's knowledge of this crossover point can prevent unique implementation of the high-investment outcome. We conclude that informational requirements are likely to severely limit a government's ability to use income-based incentive schemes as a coordination device.