World Bank-borrower relations and project supervision

This paper explores the relevance of the principal-agent model for analyzin g development projects using data from World Bank-funded projects. After de monstrating that World Bank loan agreements can be viewed as principal-agen t contracts, the paper explores the importance of the agency problem in det ermining project performance. Predictions from an adversarial model are con trasted with those from a cooperative model The importance of information i n the adversarial model links World Bank supervision to project performance . Data support the relevance of the agency problem and the role of supervis ion as monitoring. The paper concludes with suggestions for modifying proje ct selection and implementation to reduce agency problems.