Publication: Estimating the Fiscal Risks and Costs of Output-Based Payments : An Overview
Output-based payments are an important tool of government policy. Sometimes governments offer "output-based aid" to subsidize services sold to households. Because output-based payments are tied to the delivery of outputs, they have an obvious advantage over input-based payments. In agreeing to make such payments, however, governments assume a liability not unlike that created by taking on debt. Moreover, in some cases the payment amounts are subject to considerable uncertainty. As a result governments may benefit from estimating both the costs of these commitments, and the new fiscal risks they create-and comparing these costs and risks with those of alternative policies. Output-based payments come in many forms, as do the risks they present. However, measuring the risks and costs of output-based schemes is feasible but also, inevitably, mathematical. Quantifying risk necessarily involves some knowledge, and application of probability and statistics; estimating the cost of uncertain payments that occur at different points in time, requires asset pricing techniques from modern finance theory. Nevertheless, most of the important issues are conceptual, rather than technical.
“Boyle, Glenn; Irwin, Timothy. 2005. Estimating the Fiscal Risks and Costs of Output-Based Payments : An Overview. OBApproaches; Note. No. 8. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/870cb8c2-6c86-5f83-af80-b144962e340a License: CC BY 3.0 IGO.”