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Aid Effectiveness and Limited Enforceable Conditionality

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  • Almuth Scholl

    (University of Konstanz)

Abstract

This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modeled as a limited enforceable dynamic contract. We define the contract to be self-enforcing if, at any point in time, the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that optimal self-enforcing conditional aid strongly stimulates the developing economy and substantially increases welfare. However, aid effectiveness comes at a high cost: to ensure enforceability, less benevolent political regimes receive permanently larger aid funds in return for a less intense conditionality. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2008.09.005
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 2 (April)
Pages: 377-391

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Handle: RePEc:red:issued:07-180

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Keywords: Foreign aid; Conditionality; Limited enforceability; Dynamic contracts; Neoclassical growth;

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Citations

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Cited by:
  1. Fabian Fink & Almuth Scholl, 2011. "A Quantitative Model of Sovereign Debt, Bailouts and Conditionality," Working Paper Series of the Department of Economics, University of Konstanz 2011-46, Department of Economics, University of Konstanz.
  2. Bauducco, Sofia & Caprioli, Francesco, 2014. "Optimal fiscal policy in a small open economy with limited commitment," Journal of International Economics, Elsevier, vol. 93(2), pages 302-315.
  3. Mark Aguiar & Manuel Amador, 2010. "Growth in the Shadow of Expropriation," 2010 Meeting Papers 1194, Society for Economic Dynamics.
  4. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, Elsevier.
  5. Almuth Scholl, 2013. "Debt Relief for Poor Countries: Conditionality and Effectiveness," Working Paper Series of the Department of Economics, University of Konstanz 2013-23, Department of Economics, University of Konstanz.
  6. Victor, David, 2013. "Foreign aid for capacity-building to address climate change: Insights and applications," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Patrick Carter, 2012. "Aid Allocation Rules," Bristol Economics Discussion Papers 12/630, Department of Economics, University of Bristol, UK.

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