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Asymmetric information, rent extraction and aid efficiency

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  • Julia Cagé

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

Abstract

Official Development Aid allows are volatile, non-predictable and not delivered in a transparent way. All these features reinforce asymmetric information between the citizens and the recipient government about the amount of aid flows received by developing countries. This article uses a political economy model of rent extraction to show how this asymmetry (i) encourages rent extraction by kleptocratic regimes, thus reducing aid efficiency, and (ii) increases the negative impact of aid volatility. It identifies a new channel - the "asymmetric information" channel - through which aid volatility is costly for recipient countries. The empirical relevance of the model is confirmed on a panel data of developing countries. Using various specifications and econometric methods, and developing new yearly estimates of aid volatility, I show that (i) introducing more information increases aid efficiency, that (ii) the negative impact of aid volatility on aid efficiency vanishes once one controls for information, and that (iii) this positive impact of information does not come from the fact that more transparent countries tend to have better institutions.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00575055.

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Date of creation: Nov 2009
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Handle: RePEc:hal:psewpa:halshs-00575055

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Keywords: foreign aid ; asymmetric information ; rent extraction ; volatility;

References

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Cited by:
  1. Brück, Tilman & Xu, Guo, 2012. "Who gives aid to whom and when? Aid accelerations, shocks and policies," European Journal of Political Economy, Elsevier, vol. 28(4), pages 593-606.
  2. Williams, Andrew, 2011. "Shining a Light on the Resource Curse: An Empirical Analysis of the Relationship Between Natural Resources, Transparency, and Economic Growth," World Development, Elsevier, vol. 39(4), pages 490-505, April.

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