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Foreign Aid and Fiscal Behavior in a Bounded Rathionality Model: Different Policy Regimes

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  • Ira N. Gang

    ()
    (Rutgers University)

  • Haider Ali Khan

    (GSIS, U of Denver and ADB)

Abstract

We examine how the source of foreign aid affects the composition of the recipient government's spending. Does the source of aid -- bilateral or miltilateral -- influence ricipient policy-makers' choice between development and nondevelopment expenditure? We depart from previous literature by introducing strong asymmetries in policy-maker's preferences. With financial constraints set by foreign aid and domestic revenues, this formalization allows us to model and estimate the fiscal behavior of government policy-makers in the presense of foreign aid.

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199812.

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Date of creation: 10 Jun 1998
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Handle: RePEc:rut:rutres:199812

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Keywords: foreign aid; India; international assistance;

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References

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  1. Sengupta, J K, 1970. "Optimal Stabilization Policy with a Quadratic Criterion Function," Review of Economic Studies, Wiley Blackwell, vol. 37(1), pages 127-45, January.
  2. Binh, Tran-Nam & McGillivray, Mark, 1993. "Foreign aid, taxes and public investment A comment," Journal of Development Economics, Elsevier, vol. 41(1), pages 173-176, June.
  3. Cashel-Cordo, Peter & Craig, Steven G, 1997. "Donor Preferences and Recipient Fiscal Behavior: A Simultaneous Analysis of Foreign Aid," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 653-71, July.
  4. Frey, Bruno S. & Schneider, Friedrich, 1986. "Competing models of international lending activity," Journal of Development Economics, Elsevier, vol. 20(2), pages 225-245, March.
  5. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May.
  6. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September.
  7. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
  8. Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October.
  9. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
  10. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  11. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-45, June.
  12. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-94, March.
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Cited by:
  1. George Mavrotas & Bazoumana Ouattara, 2007. "Aid Modalities and Budgetary Response: Panel Data Evidence," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 720-741, December.
  2. Gil S. Epstein & Ira N. Gang, 2006. "Good Governance and Good Aid Allocation," Departmental Working Papers 200627, Rutgers University, Department of Economics.
  3. José Antonio Alonso & Carlos Garcimartín, . "Does Aid Hinder Tax Efforts? More Evidence," Discussion Papers 11/04, University of Nottingham, CREDIT.
  4. Simon Feeny, 2006. "Policy preferences in fiscal response studies," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1167-1175.
  5. Sadegh Bakhtiari & Hojjat Izadkhasti & Seyed Komail Tayebi, 2013. "Crowding out Effect of Foreign Aid in Selected Developing Countries: Panel Data Evidence," Iranian Economic Review, Economics faculty of Tehran university, vol. 18(2), pages 51-64, spring.
  6. B Ouattara, 2004. "Does Aid Promote Fiscal Indiscipline? Evidence from Dynamic Panel Model," The School of Economics Discussion Paper Series 0407, Economics, The University of Manchester.
  7. Gil S. Epstein & Ira N Gang, 2006. "The Hope for Hysteresis in Foreign Aid," Departmental Working Papers 200628, Rutgers University, Department of Economics.
  8. Feeny, Simon & McGillivray, Mark, 2009. "Aid and Public Sector Fiscal Behaviour in Failing States," MPRA Paper 21801, University Library of Munich, Germany.
  9. Khan, Haider, 2013. "Globalization and Democracy: A Short Introduction," MPRA Paper 49515, University Library of Munich, Germany.
  10. Bazoumana Ouattara, 2006. "Aid, debt and fiscal policies in Senegal," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1105-1122.
  11. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, vol. 35(3), pages 439-453, March.
  12. Oliver Morrissey & Mark McGillivray, 2010. "Fiscal Effects of Aid," Working Papers id:3194, eSocialSciences.

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