High-powered incentives and communication failure

•The paper uses a donor-provider-agent framework to study delivery of developmental goods.•We study the interplay between communication and incentives in the presence of typical and motivated providers.•We show that there exist situations where incentives can lead to non-credible communication making everyone worse off.

This paper uses a donor-provider-agent framework to study the role of provider incentives for the delivery of developmental goods like aid, credit, or technology transfer to the poor. It considers a situation where credible communication by the provider is the key to successful delivery. The study focuses on the interplay between incentives and communications and shows that the use of high-powered incentives can lead to breakdown of communication between providers and agents, leading to undesirable outcomes. However, in many situations motivated providers or state-contingent contracts can be used to achieve the second best outcome.