Samaritans, Rotten Kids and Policy Conditionality
AbstractDonors who try to impose policy conditionality on countries receiving their aid commonly face conflicting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this conflict can lead to a time-consistency problem. This paper offers a contractual analysis of conditionality, showing how conditionality contracts are affected by conflicting donor incentives in the presence of limited commitment power. Conditionality is shown to survive in an environment with weak donor commitment power, and it can eliminate the inefficiency associated with the no-conditionality outcome. However, even when conditionality is successfully imposed by donors, there may be an inverse relationship between aid and reform across different aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered.
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Bibliographic InfoPaper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2001-16.
Date of creation: 2001
Date of revision:
foreign aid; conditionality; altruism.;
Find related papers by JEL classification:
- D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- F35 - International Economics - - International Finance - - - Foreign Aid
- O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
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