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Room for discretion? Biased decision-making in international financial institutions


Lang, Valentin F; Presbitero, Andrea F (2018). Room for discretion? Biased decision-making in international financial institutions. Journal of Development Economics, 130:1-16.

Abstract

We exploit the degree of discretion embedded in the World Bank-IMF Debt Sustainability Framework (DSF) to understand the decision-making process of international financial institutions. The unique, internal dataset we use covers the universe of debt sustainability analyses conducted between December 2006 and January 2015 for low-income countries. These data allow us to identify cases where the risk rating implied by the application of the DSF's mechanical rules was overridden to assign a different official rating. Our results show that both political interests and bureaucratic incentives influence the decision to intervene in the mechanical decision-making process. Countries that are politically aligned with the institutions' major shareholders are more likely to receive an improved rating; especially in election years and when the mechanical assessment is not clear-cut. These results suggest that the room for discretion international financial institutions have can be a channel for informal governance and a source of biased decision-making.

Abstract

We exploit the degree of discretion embedded in the World Bank-IMF Debt Sustainability Framework (DSF) to understand the decision-making process of international financial institutions. The unique, internal dataset we use covers the universe of debt sustainability analyses conducted between December 2006 and January 2015 for low-income countries. These data allow us to identify cases where the risk rating implied by the application of the DSF's mechanical rules was overridden to assign a different official rating. Our results show that both political interests and bureaucratic incentives influence the decision to intervene in the mechanical decision-making process. Countries that are politically aligned with the institutions' major shareholders are more likely to receive an improved rating; especially in election years and when the mechanical assessment is not clear-cut. These results suggest that the room for discretion international financial institutions have can be a channel for informal governance and a source of biased decision-making.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:06 Faculty of Arts > Institute of Political Science
Dewey Decimal Classification:320 Political science
Scopus Subject Areas:Social Sciences & Humanities > Development
Social Sciences & Humanities > Economics and Econometrics
Uncontrolled Keywords:International organizations, political economy, IMF, World Bank, debt sustainability
Language:English
Date:January 2018
Deposited On:16 Jan 2019 13:07
Last Modified:20 May 2024 01:47
Publisher:Elsevier
ISSN:0304-3878
Additional Information:JEL codes: F34, F53, H63, H68
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jdeveco.2017.09.001