Samaritans, Rotten Kids and Policy Conditionality
AbstractDonors who try to impose policy conditionality on countries receiving their aid commonly face conÃ¢â‚¬Â¡icting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this conÃ¢â‚¬Â¡ict can lead to a time-consistency problem. This paper oÃ‚Â¤ers a contractual analysis of conditionality, showing how conditionality contracts are aÃ‚Â¤ected by conÃ¢â‚¬Â¡icting donor incentives in the presence of limited commitment power. Conditionality is shown to survive in an environment with weak donor commitment power, and it can eliminate the ineÃ‚Â¢ciency associated with the no-conditionality outcome. However, even when conditionality is successfully imposed by donors, there may be an inverse relationship between aid and reform across diÃ‚Â¤erent aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2001-16.
Date of creation: 01 Sep 2001
Date of revision:
foreign aid; conditionality; altruism.;
Find related papers by JEL classification:
- D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- F35 - International Economics - - International Finance - - - Foreign Aid
- O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
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