Separating the Willing from the Able: Is the European Union’s Mediterranean Policy Incentive Compatible?

Abstract: The European Union’s ambitious Mediterranean policy has the declared goal of bringing about economic and political transformation by explicitly linking reform with rewards. Drawing on mechanism design theory, this article argues that the EU’s Mediterranean policy has the potential to reveal information about the respective partner countries’ reform ‘types’. However, the current incentive structure of the EU’s Mediterranean policy does not fit with the requirements of incentive compatibility, which would allow for screening, because it does not encourage partner countries to reveal the costs of reform. Data on the political and economic reform performance of Mediterranean partner countries reveal the pooling pattern that we would expect from a screening model. By offering two differentiated reward agreements that are not specifically targeted towards each country’s progress on reform, the European Commission could learn which countries are sincere about reforming.