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Intrinsic vs. extrinsic incentives for reform: An informational mechanism of E(M)U conditionality

Date: 07/07/2020

Author(s): Nikitas Konstantinidis, Yiannis Karagiannis

Publication: Springer

How does the prospect of accession to an international union affect a non-member-state government’s incentives to implement political and economic liberalization reforms? To answer this question, we propose an informational mechanism of international union accession conditionality drawing on Bénabou and Tirole’s (The Review of Economic Studies, 70, 489–520, 2003) formalization of intrinsic and extrinsic motivation. In a Bayesian game of union accession between a supranational principal (e.g., EU Commission) and a national agent (e.g., the government of the target country), we find that the extrinsic bonus of post-accession transfers may on the one hand reinforce the agent’s short-term incentives to meet the accession criteria but on the other hand can also “crowd out” its intrinsic motivation to liberalize and comply with the union’s acquis in the long run. As a result, we expect that (i) net-recipient countries’ post-accession pace of reform may decline or even turn negative over time (temporal effect), (ii) the crowding-out effect will be stronger for countries that enjoy higher levels of distributive net transfers and those that go through a lengthier negotiation period (spatial effect), and (iii) early liberalizers are ex ante more likely to be officially selected as union candidate members, accept the accession contract, and implement the required reforms. We illustrate the theoretical mechanism and dynamics of the model with anecdotal evidence from two paired comparisons in respect to the effects of economic conditionality attached to EMU accession (Greece vs. Spain) and political conditionality attached to EU accession (Hungary vs. Estonia).