A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries

A well-functioning public expenditure management (PEM) system is considered a critical pillar of government efficiency, on par with a low-distortion tax system and efficient tax administration. The paper discusses PEM systems in developing countries using an analytical framework based on principal-agent theory. This simple model can be applied to various PEM systems, and allows for comparisons between institutional settings. To illustrate this, we analyze the benefits derived from the use by the Ministry of Finance (MoF) of two control instruments; ex post audits and ex ante controls, and assess their value in terms of their ability to deter cheating. We derive a set of possible "control regimes" which can be used by the MoF. Although we illustrate the use of the model using developing countries, it is also relevant to developed economies.Developing countries;Government expenditures;probability, expenditure, public expenditure, public expenditure management, expenditure management, expenditures, public spending, expenditure tracking, expenditure programs, probabilities, equation, expenditure process, survey, public expenditure management systems, health expenditure, statistics, expenditure management systems, expenditure program, poverty-reducing expenditures, equations, optimization, public expenditure tracking, fiscal policy, expenditure tracking surveys, expenditure projections, expenditure distribution, poverty-reducing expenditure, public financial management, budget expenditure, sampling, efficiency of government expenditure, statistical data, combination of factors, surveys, government expenditure, data on donor financing, public expenditure distribution, multiyear expenditure, public expenditure review, expenditure control, public expenditure tracking survey