Does it Take Two to Tango? Improving Cooperation between the IMF and the World Bank: Theory and Empirical Evidence

In this paper we present a theoretical model which, focusing on the quality of information transmission between the IMF and the WB, analyzes the sources of the expected loss in the overall performance of the two institutions relative to the first best outcome, which is characterized by centralized decision and perfect information. In particular, given the Bank-Fund strong complementarities, we show that strategic communication is indeed the primary source of loss for the two institutions. A testable implication of the model is to relate Bank-Fund's performance to their willingness (or ability) to communicate. We find evidence that a Bank-Fund simultaneous loan is beneficial to growth and, consistently with the theory, such beneficial effect is reduced by factors preventing full communication, such as the degree of Bank-Fund competition and the salience of their private information.