In many developing countries, government regulations and red tape impose high co

Question

In many developing countries, government regulations and red tape impose high costs on those who officially register capital ownership. The dead capital problem that these government inefficiencies create reduces investment and growth. As a result, there is a negative relationship between the measures of government inefficiency and economic growth.
Propose at least three methods that governments should employ to reduce their exposure to asymmetric information problems when attempting to identify entrepreneurial projects supported by public funds. Support your recommendations with appropriate rationale.

Explanation / Answer

1. Make the other company feel the harms if the land isn't used properly (eliminates some moral hazard)
2. Have competing bids for use of the land. This allows the government to know all the options of what they can do it with it.
3. Credit checks/environmental checks. Make sure these groups are worthy of the land and won't fail. Imposing fines is great, but if the company just goes bankrupt you get no money.

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