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Why corrupt governments may receive more foreign aid

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  • DE LA CROIX, David

    ()
    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • DELAVALLADE, Clara

    ()
    (Abdul Latif Jameel Poverty Action Lab.)

Abstract

In this paper we argue that if the cross-country heterogeneity in productivity is more important than the heterogeneity in government quality, it can be optimal to give more foreign aid to more corrupt countries. We build a multi-country model of optimal aid in which we disentangle the correlation between aid and equilibrium corruption into two components: the first one reflects variations in the quality of institutions and the second encompasses variations in productivity levels. The data suggest that both components of the correlation are significant, however the effect of variations in productivity levels is stronger. This implies that most corrupt countries, since they are also the poorest, receive higher amounts of foreign aid.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2009065.

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Date of creation: 01 Oct 2009
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Handle: RePEc:cor:louvco:2009065

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Keywords: corruption; aid; government spending; institutions;

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Cited by:
  1. Nasir Iqbal & Vince Daly, 2013. "Rent Seeking Opportunities and Economic Growth in Transitional Economies," PIDE-Working Papers 2013:87, Pakistan Institute of Development Economics.

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