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Collusion Among Interest Grops: Foreign Aid and Rent Dissipation

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  • Svensson, Jakob

    ()
    (The World Bank)

Abstract

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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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 610.

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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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Keywords: game-theoretic model; public policy; developing country; government revenue; crowding out; foreign aid;

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References

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  1. Casella, Alessandra & Eichengreen, Barry, 1994. "Can Foreign Aid Accelerate Stabilization?," CEPR Discussion Papers 961, C.E.P.R. Discussion Papers.
  2. Hirshleifer, Jack, 1995. "Anarchy and Its Breakdown," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 26-52, February.
  3. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  5. Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May.
  6. Klitgaard, Robert, 1989. "Incentive myopia," World Development, Elsevier, vol. 17(4), pages 447-459, April.
  7. Mariano Tommasi, 1995. "Where are we in the Political Economy of Reform?," UCLA Economics Working Papers 733, UCLA Department of Economics.
  8. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  9. Acemoglu, D. & Verdier, T., 1996. "Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach," Working papers 96-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Aaron Tornell, 1993. "Economic Growth and Decline with Endogenous Property Rights," NBER Working Papers 4354, National Bureau of Economic Research, Inc.
  11. Mohammad, Sharif & Whalley, John, 1984. "Rent Seeking in India: Its Costs and Policy Significance," Kyklos, Wiley Blackwell, vol. 37(3), pages 387-413.
  12. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  13. Joshua Aizenman, 1990. "Soft Budget Constraints, Taxes, and the Incentive to Cooperate," NBER Working Papers 3561, National Bureau of Economic Research, Inc.
  14. Svensson, J., 1995. "When Is Foreign Aid Policy Credible? Aid Dependence and Conditionality," Papers 600, Stockholm - International Economic Studies.
  15. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  16. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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Cited by:
  1. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  2. Abdiweli Ali & Hodan Isse, 2006. "An Empirical Analysis of the Determinants of Foreign Aid: A Panel Approach," International Advances in Economic Research, Springer, vol. 12(2), pages 241-250, May.

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