Post-Crisis Lesson for EMU Governance from the Principal-Agent Approach
Luca Barbone and
Grzegorz Poniatowski
No 457, CASE Network Studies and Analyses from CASE-Center for Social and Economic Research
Abstract:
This paper contributes to the ongoing debate on fiscal consolidation and the questionable effectiveness of the Stability and Growth Pact by addressing the problem of economic governance in the EMU with a game-theoretic principal-agent approach. Following the theory of delegation, we develop a principal-multi agent model where the EMU authorities act as a collective principal that designs contracts for each of two agents that reflect Europe’s ”South” and ”North”. We investigate what happens when agents face hidden-information moral hazard problem and when they are able to coordinate their actions. Bearing in mind the applicability of incentive mechanisms, we discuss the optimal contracts for the principal and each of the agents. We prove that the most efficient solution consists of tailor-made contracts, according to which highly indebted countries must be offered strong incentive mechanisms in the form of substantial penalties but also rewards (e.g., preferential loans). We also stress the importance of taking into account positive spillover effects, which could be facilitated by economic integration and fiscal policy coordination between the EMU Members.
Keywords: Moral Hazard; Principal-Agent; EU Economic Governance; Fiscal Compact (search for similar items in EconPapers)
JEL-codes: D82 E61 H60 (search for similar items in EconPapers)
Pages: 27
Date: 2013-07
New Economics Papers: this item is included in nep-cta and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
https://case-research.eu/sites/default/files/publications/CNSA_2013_457.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:sec:cnstan:0457
Access Statistics for this paper
More papers in CASE Network Studies and Analyses from CASE-Center for Social and Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Marta Kowerko ().