This paper develops a game-theoretic model of public policy in a developing country in order to explain a number of empirical regularities. It is shown that under certain circumstances, an increase in government revenue will be completely crowded out by increased rent dissipation, leaving the provision of public goods unaltered. In this model, there are two possible ways in which foreign aid may affect the outcome. First, as foreign aid to a large extent can be seen as general budget support, the paper provides an explanation for why increased disbursements do not necessarily lead to higher provision of public goods. Second, the mere fact that the donor is expected to allocate aid according to the recipients' future needs may increase rent dissipation and reduce the number of periods in which efficient policies can be sustained.
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Publisher Info
Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number
610.
Length: 32 pages Date of creation: 03 Nov 1997 Date of revision: Publication status: Published in Journal of International Economics, 2000, pages 437-461. Handle: RePEc:hhs:iiessp:0610
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Find related papers by JEL classification: O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations O20 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - General
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