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Aid Effectiveness and Limited Enforceable Conditionality

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  • Almuth Scholl

Abstract

This paper analyzes optimal foreign aid policy in a neoclassical framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modelled as a limited enforceable contract. We define conditional aid policy to be self-enforcing if, at any point in time, the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that the effectiveness of unconditional aid is low while self-enforcing conditional aid strongly stimulates the economy. However, increasing the welfare of the poor comes at high cost: to ensure aid effectiveness, less democratic political regimes receive permanently larger aid funds.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-054.

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Length: 48 pages
Date of creation: Jan 2005
Date of revision: Aug 2005
Handle: RePEc:hum:wpaper:sfb649dp2005-054

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Cited by:
  1. Sofia Bauducco & Francesco Caprioli, 2011. "Optimal Fiscal Policy in a Small Open Economy with Limited Commitment," Working Papers Central Bank of Chile 644, Central Bank of Chile.
  2. Victor, David, 2013. "Foreign aid for capacity-building to address climate change: Insights and applications," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Almuth Scholl, 2013. "Debt Relief for Poor Countries: Conditionality and Effectiveness," Working Paper Series of the Department of Economics, University of Konstanz 2013-23, Department of Economics, University of Konstanz.
  4. Patrick Carter, 2012. "Aid Allocation Rules," Bristol Economics Discussion Papers 12/630, Department of Economics, University of Bristol, UK.
  5. Mark Aguiar & Manuel Amador, 2010. "Growth in the Shadow of Expropriation," 2010 Meeting Papers 1194, Society for Economic Dynamics.
  6. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, Elsevier.
  7. Fabian Fink & Almuth Scholl, 2011. "A Quantitative Model of Sovereign Debt, Bailouts and Conditionality," Working Paper Series of the Department of Economics, University of Konstanz 2011-46, Department of Economics, University of Konstanz.

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