ABSTRACT
Governments can encourage market development by clearly defining property rights, ensuring a sound regulatory framework, and pursuing industrial policies. Even in countries with well-defined property rights, information and coordination problems can impede market and private sector development. Coordination is difficult because self-interested people and firms generally are willing to share information only when they do not lose by doing so. The risk that other parties might renege on agreements makes it difficult for firms to take advantage of opportunities for mutual gain. However, states can alleviate information and coordination problems through regulation and industrial policy. Regulation in the utilities sector remains crucial, even in the wake of revolutionary technological changes. The case for regulation in the financial sector is also compelling. In the absence of regulatory incentives to provide reliable information, banks can easily disguise the extent of nonperforming loans in their portfolio—and their own lack of solvency. Information asymmetries in the banking sector can be destabilizing.
