Intrinsic vs. Extrinsic Incentives for Reform: An Informational Mechanism of EU Conditionality

How does the prospect of EU accession a¤ect candidate members incentives to im-plement political and economic reforms? On the ip side of the question, how does the threat of expulsion from a union a¤ect a member-state governments political will for compliance with existing policy standards and criteria? To answer these questions, we propose an informational mechanism of EU conditionality drawing on Bénabou and Ti-roles (2003) formalization of intrinsic and extrinsic motivation. In a Bayesian game of enlargement between a principal (EU Commission) and an agent (candidate member gov-ernment), we \u85nd that the extrinsic bonus of post-accession transfers may, on one hand, reinforce short-term incentives to satisfy membership criteria, yet, at the same time, it will increase moral hazard by crowding outthe agents intrinsic motivation to liberalize in the long-term. As a result, we expect that i) net-recipient countriespost-accession pace of reform will decline over time, ii) the crowding oute¤ect will be stronger for countries that enjoy higher levels of net transfers, and iii) early liberalizersare ex ante more likely to accept the conditionality package and implement the necessary reforms for accession.