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Good governance and good aid allocation

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Author Info
Epstein, Gil S.
Gang, Ira N.

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Abstract

We model the aid allocation process as a rent-seeking contest between two countries and investigate the effects of differing allocation rules on recipients' behavior in a simple framework. We investigate the aid allocation mechanism design that attempts to increase the governance quality of potential recipient countries: the potential recipients spend costly resources improving governance, while the donor country allocates the fund based on their governance quality. The paper compares two mechanisms: one uses a simple winner-takes-all tournament to award the entire available purse to the country with the best governance; while under the other aid is distributed among countries in proportion to their governance qualities. The paper shows the second mechanism outperforms the first only if competing countries are sufficiently asymmetric. Moreover, the recipient who is most effective in governance - and stands to benefit the most from development assistance - has interests opposite to those of the donor. In addition, the paper shows that if the donor country allocates the fund based on both governance and the levels of poverty, it may result in a poverty trap: the leaders of potential recipient countries deliberately allocate funds away from the poorest so as not to better their position in order to receive more aid.

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File URL: http://www.sciencedirect.com/science/article/B6VBV-4STGRX9-2/2/df277f2481d9bf58544b067ef7790c64
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Publisher Info
Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 89 (2009)
Issue (Month): 1 (May)
Pages: 12-18
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Handle: RePEc:eee:deveco:v:89:y:2009:i:1:p:12-18

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Web page: http://www.elsevier.com/locate/devec

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Related research
Keywords: Foreign aid Governance Decentralization Rent seeking;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November. [Downloadable!] (restricted)
  2. Arye L. Hillman & John G. Riley, 1987. "Politically Contestable Rents and Transfers," UCLA Economics Working Papers 452, UCLA Department of Economics. [Downloadable!]
  3. Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May. [Downloadable!] (restricted)
  4. Baye, M.R. & Kovenock, D. & De Vries, C.G., 1992. "Rigging the Lobbying Process: An Application of the All- Pay Auction," Papers 9-92-2, Pennsylvania State - Department of Economics.
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  5. Gil S. Epstein & Shmuel Nitzan, 2006. "Effort and Performance in Public Policy Contests," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(2), pages 265-282, 05. [Downloadable!] (restricted)
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  6. Gil S. Epstein & Ira N. Gang, 2006. "Contests, NGOs, and Decentralizing Aid," Review of Development Economics, Blackwell Publishing, vol. 10(2), pages 285-296, 05. [Downloadable!] (restricted)
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  7. Epstein, Gil S., 2000. "Personal productivity and the likelihood of electoral success of political candidates," European Journal of Political Economy, Elsevier, vol. 16(1), pages 95-111, March. [Downloadable!] (restricted)
  8. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, Oxford University Press, vol. 12(1), pages 29-58, January.
  9. Heckelman, Jac & Knack, Stephen, 2005. "Foreign aid and market-liberalizing reform," Policy Research Working Paper Series 3557, The World Bank. [Downloadable!]
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  10. Gil Epstein & Shmuel Nitzan, 2006. "Reduced prizes and increased effort in contests," Social Choice and Welfare, Springer, vol. 26(3), pages 447-453, June. [Downloadable!] (restricted)
  11. Mavrotas, George & Villanger, Espen, 2006. "Multilateral Aid Agencies and Strategic Donor Behaviour," Working Papers DP2006/02, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  12. Che, Yeon-Koo & Gale, Ian L, 1998. "Caps on Political Lobbying," American Economic Review, American Economic Association, vol. 88(3), pages 643-51, June. [Downloadable!] (restricted)
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  13. Ellingsen, Tore, 1991. "Strategic Buyers and the Social Cost of Monopoly," American Economic Review, American Economic Association, vol. 81(3), pages 648-57, June. [Downloadable!] (restricted)
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  14. Ira N. Gang & Haider Ali Khan, 1999. "Foreign aid and fiscal behavior in a bounded rationality model: Different policy regimes," Empirical Economics, Springer, vol. 24(1), pages 121-134. [Downloadable!] (restricted)
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