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Herding in Aid Allocation

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Author Info

  • Frot, Emmanuel

    ()
    (Stockholm Institute of Transition Economics)

  • Santiso, Javier

    ()
    (OECD Development Centre)

Abstract

Although there exists a vast literature on aid efficiency (the effect of aid on GDP), and that aid allocation determinants have been estimated, little is known about the minute details of aid allocation. This article investigates empirically a claim repeatedly made in the past that aid donors herd. Building upon a methodology applied to financial markets, this article finds that aid donors herd similarly to portfolio funds on financial markets. It also estimates the causes of herding and finds that political transitions towards more autocratic regimes repel donors, but that transitions towards democracy have no effect. Finally, identified causes of herding explain little of its overall level, suggesting strategic motives play an important role.

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Bibliographic Info

Paper provided by Stockholm Institute of Transition Economics, Stockholm School of Economics in its series SITE Working Paper Series with number 5.

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Length: 31 pages
Date of creation: 20 Jul 2009
Date of revision: 02 Oct 2009
Handle: RePEc:hhs:hasite:0005

Contact details of provider:
Postal: Stockholm Institute of Transition Economics, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Phone: (+46 8) 736 9670
Fax: (+46 8) 31 64 22
Web page: http://www.hhs.se/site/
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Keywords: aid; herding; volatility; fragmentation;

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References

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  1. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
  2. Alesina, Alberto & Dollar, David, 2000. " Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
  3. Leslie E. Papke & Jeffrey M. Wooldridge, 1993. "Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates," NBER Technical Working Papers 0147, National Bureau of Economic Research, Inc.
  4. Stefaan Marysse & An Ansoms & Danny Cassimon, 2007. "The Aid 'Darlings' and 'Orphans' of the Great Lakes Region in Africa," European Journal of Development Research, Taylor and Francis Journals, vol. 19(3), pages 433-458.
  5. Emmanuel Frot & Javier Santiso, 2008. "Development Aid and Portfolio Funds: Trends, Volatility and Fragmentation," OECD Development Centre Working Papers 275, OECD Publishing.
  6. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
  7. Knack, Stephen & Rahman, Aminur, 2004. "Donor fragmentation and bureaucratic quality in aid recipients," Policy Research Working Paper Series 3186, The World Bank.
  8. Alberto Alesina & Beatrice Weder, 1999. "Do Corrupt Governments Receive Less Foreign Aid?," NBER Working Papers 7108, National Bureau of Economic Research, Inc.
  9. William Easterly & Tobias Pfutze, 2008. "Where Does the Money Go? Best and Worst Practices in Foreign Aid," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 29-52, Spring.
  10. Timothy D. Lane & Leslie Lipschitz & Cristina Arellano & Ales Bulir, 2005. "The Dynamic Implications of Foreign Aid and Its Variability," IMF Working Papers 05/119, International Monetary Fund.
  11. Javier Rodríguez & Javier Santiso, 2007. "Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Markets," OECD Development Centre Working Papers 259, OECD Publishing.
  12. Uchida, Hirofumi & Nakagawa, Ryuichi, 2007. "Herd behavior in the Japanese loan market: Evidence from bank panel data," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 555-583, October.
  13. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," William Davidson Institute Working Papers Series 79, William Davidson Institute at the University of Michigan.
  14. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
  15. Gina Yannitell Reinhardt, 2006. "Shortcuts and Signals: An Analysis of the Micro-level Determinants of Aid Allocation, with Case Study Evidence from Brazil," Review of Development Economics, Wiley Blackwell, vol. 10(2), pages 297-312, 05.
  16. A. Javier Hamann & Ales Bulir, 2006. "Volatility of Development Aid: From the Frying Pan Into the Fire?," IMF Working Papers 06/65, International Monetary Fund.
  17. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
  18. Finn Tarp & Christian F. Bach & Henrik Hansen & Søren Baunsgaard, 1998. "Danish Aid Policy: Theory and Empirical Evidence," Discussion Papers 98-06, University of Copenhagen. Department of Economics.
  19. Barbara Alemanni & José Renato Haas Ornelas, 2006. "Herding Behavior by Equity Foreign Investors on Emerging Markets," Working Papers Series 125, Central Bank of Brazil, Research Department.
  20. Javier Rodríguez & Javier Santiso, 2007. "Banking on Development: Private Banks ans Aid Donors in Developing Countries," OECD Development Centre Working Papers 263, OECD Publishing.
  21. Helmut Reisen & Sokhna Ndoye, 2008. "Prudent versus Imprudent Lending to Africa: From debt relief to emerging lenders," OECD Development Centre Working Papers 268, OECD Publishing.
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Citations

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Cited by:
  1. Peter Nunnenkamp & Hannes Öhler & Rainer Thiele, 2013. "Donor coordination and specialization: did the Paris Declaration make a difference?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 149(3), pages 537-563, September.
  2. Christopher Kilby, 2010. "What Determines the Size of Aid Projects?," Villanova School of Business Department of Economics and Statistics Working Paper Series 10, Villanova School of Business Department of Economics and Statistics.
  3. Kurt Annen & Luc Moers, 2012. "Donor Competition for Aid Impact, and Aid Fragmentation," IMF Working Papers 12/204, International Monetary Fund.
  4. Olofsgård, Anders & Perrotta, Maria & Frot, Emmanuel, 2013. "Aid E ectiveness in Times of Political Change: Lessons from the Post-Communist Transition," SITE Working Paper Series 25, Stockholm Institute of Transition Economics, Stockholm School of Economics.
  5. Bain, Robert & Luyendijk, Rolf & Bartram, Jamie, 2013. "Universal access to drinking water: the role of aid," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Andreas Fuchs & Axel Dreher & Peter Nunnenkamp, 2012. "Determinants of Donor Generosity: A Survey of the Aid Budget Literature," Kiel Working Papers 1789, Kiel Institute for the World Economy.
  7. Isabel Ortiz & Jingqing Chai & Matthew Cummins, 2011. "Identifying Fiscal Space:Options for Social and Economic Development for Children and Poor Households in 184 Countries," Working papers 1108, UNICEF,Division of Policy and Strategy.
  8. Oscar Becerra & Eduardo Cavallo & Ilan Noy, 2010. "In the Aftermath of Large Natural Disasters, what happens to foreign aid?," Working Papers 201018, University of Hawaii at Manoa, Department of Economics.
  9. Andreas Fuchs & Peter Nunnenkamp & Hannes Öhler, 2013. "Why Donors of Foreign Aid Do Not Coordinate: The Role of Competition for Export Markets and Political Support," Kiel Working Papers 1825, Kiel Institute for the World Economy.
  10. Ronald B. Davies & Stephan Klasen, 2013. "Of Donor Coordination, Free-Riding, Darlings, and Orphans: The Dependence of Bilateral Aid on Other Bilateral Giving," CESifo Working Paper Series 4177, CESifo Group Munich.
  11. Öhler, Hannes, 2013. "Do Aid Donors Coordinate Within Recipient Countries?," Working Papers 0539, University of Heidelberg, Department of Economics.

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