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Moral hazard and the composition of transfers: theory and evidence from cross-border transfers

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  • J. Amegashie
  • Bazoumana Ouattara
  • Eric Strobl

Abstract

We study how a donor can use restricted transfers to control the moral hazard behavior of a recipient and how the composition of unrestricted and restricted transfers is adjusted in response to changes in the moral hazard behavior of the recipient. Under certain conditions, our game-theoretic model predicts that the donor reduces the proportion of restricted transfers in total transfers as the moral hazard behavior of the recipient declines. Using foreign aid transfers (i.e., project aid and program aid) and panel data covering the period 1991–2007, we find econometric support for the prediction of the model. Our results suggest that some variables that affect the size of foreign aid may have no effect on the composition of aid. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • J. Amegashie & Bazoumana Ouattara & Eric Strobl, 2013. "Moral hazard and the composition of transfers: theory and evidence from cross-border transfers," Economics of Governance, Springer, vol. 14(3), pages 279-301, August.
    • Handle: RePEc:spr:ecogov:v:14:y:2013:i:3:p:279-301
    DOI: 10.1007/s10101-013-0123-4
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    2. J. Atsu Amegashie, 2016. "Public Goods, Signaling, and Norms of Conscientious Leadership," CESifo Working Paper Series 6247, CESifo.
    3. Ravetti, Chiara & Sarr, Mare & Swanson, Tim, 2018. "Foreign aid and political instability in resource-rich countries," Resources Policy, Elsevier, vol. 58(C), pages 277-294.
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    5. Reinsberg, Bernhard, 2015. "Foreign Aid Responses to Political Liberalization," World Development, Elsevier, vol. 75(C), pages 46-61.

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    More about this item

    Keywords

    Public goods; Moral hazard; Political agency; Project aid; Program aid; Signaling; D73; F35; H87; I38;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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