Aid and Fiscal Instability
AbstractWe show that a combination of temporariness and spending pressure is intrinsic to the aid relationship. In our analysis, recipients rationally discount the pronouncements of donors about the duration of their commitments because in equilibrium they know that some donors will honor those commitments while others will not. Donor types pool in equilibrium; in sharp contrast to conventional signaling situations, there is no separating equilibrium in pure strategies. Moreover, pooling necessarily creates what we call ex ante fiscal instability: expenditure smoothing is perfect ex post if the donor proves permanent, but if the donor is temporary the recipient faces an aid collapse and a fiscal adjustment problem. The Samaritan’s dilemma is at work here, in the guise of a use-it-or-lose-it restriction on spending out of aid. This restriction can produce ex ante fiscal instability even when information is symmetric.
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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 2008-18.
Date of creation: 2008
Date of revision:
Aid; Fiscal instability; Use it or lose it; Samaritan’s dilemma; Pooling;
Other versions of this item:
- O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy
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- Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
- Christopher Adam & Anthony Simpasa, 2010. "Harnessing Resource Revenues for Prosperity in Zambia," OxCarre Working Papers 036, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
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