ABSTRACT
This paper discusses the reform of the State under two aspects: “what the State must do” and “what kind of State will provide only what must be done”. First it revises the history of the State and economy relationship, evidencing the repercussion of the theory of incomplete markets and incomplete information. Following, the paper analyses three groups of relations of the “principal-agent” kind: between governments and private economic agents (regulation), politicians and bureaucrats (oversight), and citizens and governments (accountability). The conclusion is that the performance of the State depends on the institutional structure of all these mechanisms, and that well-structured institutions will permit and induce government to intervene in the economy in a superior way than a non-interventionist State.
KEYWORDS:
State reform; structure of government; public expenditure