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The optimal sequencing of carrots

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  • Steele, Jennifer L.
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    Abstract

    When aid organizations contract with local agents aid funds have the potential to be diverted to purposes other than the intended project. A multi-stage game is presented where the benefit from the project is cumulative, with the application of funds in each stage increasing both the agent's and the organization's benefit from the project. As the agent's utility of diversion increases, the allocation in each stage decreases and the project takes more stages to complete. When contracting with agents with high utilities of diversion the optimal contract involves bloated projects and a side payment to the agent upon completion. If the organization's commitment to the contract is not credible both the agent's and the organization's benefit is reduced.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Development Economics.

    Volume (Year): 93 (2010)
    Issue (Month): 1 (September)
    Pages: 1-6

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    Handle: RePEc:eee:deveco:v:93:y:2010:i:1:p:1-6

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

    Related research

    Keywords: Development Aid Public projects Corruption;

    References

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    1. Admati, Anat R & Perry, Motty, 1991. "Joint Projects without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 259-76, April.
    2. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    3. Marx, Leslie M & Matthews, Steven A, 2000. "Dynamic Voluntary Contribution to a Public Project," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 327-58, April.
    4. Marcet, Albert & Marimon, Ramon, 1992. "Communication, commitment, and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 219-249, December.
    5. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.
    6. Bulow, Jeremy & Rogoff, Kenneth S., 2005. "Grants versus Loans for Development Banks," Scholarly Articles 11129181, Harvard University Department of Economics.
    7. Malueg, David A, 1988. "Repeated Insurance Contracts with Differential Learning," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 177-81, January.
    8. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
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