Guarantees, Subsidies, or Paying for Success? Choosing the Right Instrument to Catalyze Private Investment in Developing Countries

Guarantees, Subsidies, or Paying for Success? Choosing the Right Instrument to Catalyze Private Investment in Developing Countries argues that the public sector is unlikely to have better information about risk and reward than the private sector, so using guarantees or subsidies shifts downside risk from private firms to taxpayers. The paper proposes a better contract to support private sector investment by enhancing the returns to the private sector, linking payments to specific, measurable, and agreed milestones or outputs. The paper argues that these contracts are less distortionary and produce better results for a lower expected cost than other incentive programmes.