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Samaritans, Rotten Kids and Policy Conditionality

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  • Giulio Federico
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    Abstract

    Donors who try to impose policy conditionality on countries receiving their aid commonly face con‡icting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this con‡ict can lead to a time-consistency problem. This paper o¤ers a contractual analysis of conditionality, showing how conditionality contracts are a¤ected by con‡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 ine¢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 di¤erent aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered.

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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2001-16.

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    Date of creation: 01 Sep 2001
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    Handle: RePEc:oxf:wpaper:wps/2001-16

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    Related research

    Keywords: foreign aid; conditionality; altruism.;

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    Cited by:
    1. Almuth Scholl, 2005. "Aid Effectiveness and Limited Enforceable Conditionality," SFB 649 Discussion Papers SFB649DP2005-054, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Aug 2005.
    2. Rodney Ramcharan, 2004. "Debt “Hold Up†and International Lending," Econometric Society 2004 Far Eastern Meetings 462, Econometric Society.
    3. Tito Cordella & Giovanni Dell'Aricca, 2002. "Limits of Conditionality in Poverty Reduction Programs," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 68-86.
    4. Rodney Ramcharan, 2004. "Debt Hold Up and International Lending," Econometric Society 2004 North American Summer Meetings 341, Econometric Society.
    5. Rodney Ramcharan, 2003. "Reputation, Debt, and Policy Conditionality," IMF Working Papers 03/192, International Monetary Fund.
    6. Rodney Ramcharan, 2002. "How Does Conditional Aid (Not) Work?," IMF Working Papers 02/183, International Monetary Fund.

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