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Donor Competition for Aid Impact, and Aid Fragmentation

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  • Kurt Annen
  • Luc Moers

Abstract

This paper shows that donors that maximize relative aid impact spread their budgets across many recipient countries in a unique Nash equilibrium, explaining aid fragmentation. This equilibrium may be inefficient even without fixed costs, and the inefficiency increases in the equality of donors' budgets. The paper presents empirical evidence consistent with theoretical results. These imply that, short of ending donors' maximization of relative aid impact, agreements to better coordinate aid allocations are not implementable. Moreover, since policies to increase donor competition in terms of aid effectiveness risk reinforcing relativeness, they may well backfire, as any such reinforcement increases aid fragmentation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/204.

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Length: 37
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/204

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Related research

Keywords: Economic models; Resource allocation; foreign aid; humanitarian aid; aid coordination; foreign investment; fixed costs; aid allocation; aid effectiveness; development assistance; diminishing returns; aid agencies;

References

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  1. Emmanuel Frot & Javier Santiso, 2011. "Herding in Aid Allocation," Kyklos, Wiley Blackwell, vol. 64(1), pages 54-74, 02.
  2. Svensson, Jakob, 2003. "Why conditional aid does not work and what can be done about it?," Journal of Development Economics, Elsevier, vol. 70(2), pages 381-402, April.
  3. 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.
  4. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
  5. Easterly, William & Williamson, Claudia R., 2011. "Rhetoric versus Reality: The Best and Worst of Aid Agency Practices," World Development, Elsevier, vol. 39(11), pages 1930-1949.
  6. Knack, Stephen & Rahman, Aminur, 2004. "Donor fragmentation and bureaucratic quality in aid recipients," Policy Research Working Paper Series 3186, The World Bank.
  7. Knack, Stephen & Rogers, F. Halsey & Eubank, Nicholas, 2010. "Aid quality and donor rankings," Policy Research Working Paper Series 5290, The World Bank.
  8. Annen Kurt & Kosempel Stephen, 2009. "Foreign Aid, Donor Fragmentation, and Economic Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-32, August.
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