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On the Non-Contractual Nature of Donor-Recipient Interaction in Development Assistance

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  • Murshed, S. Mansoob
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    Abstract

    This paper analyses three issues in strategic donor-recipient interaction motivated by the complexity of the rationale underlying aid. The first is when we have several principals with conflicting objectives. Any one principal cannot offer high powered incentives to the agent to carry out their designated task. The second is to do with the fact that effort associated with ensuring aid effectiveness may concern both principal and agent; the optimal solution to which requires difficult to design cooperative behaviour. Consequently, the contractual type principal-agent relationship between donors and recipients is inappropriate. We need to consider models that signal recipient quality or commitment to reform. A simple model of signalling with commitment problems is presented, along with extensions to multiple types of agents and time periods, as well as possible solutions involving mechanism design.

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    File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-71.pdf
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    Bibliographic Info

    Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/71.

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    Length: 16 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:unu:wpaper:rp2008-71

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    Related research

    Keywords: aid; conditionality; contracting; signalling quality; mechanism design;

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    References

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    1. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
    2. Murshed, S. Mansoob, 2004. "Strategic interaction and donor policy determination," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 311-323.
    3. Torsvik, Gaute, 2005. "Foreign economic aid; should donors cooperate?," Journal of Development Economics, Elsevier, vol. 77(2), pages 503-515, August.
    4. Gina Yannitell Reinhardt, 2006. "Shortcuts and Signals: An Analysis of the Micro-level Determinants of Aid Allocation, with Case Study Evidence from Brazil," Review of Development Economics, Wiley Blackwell, vol. 10(2), pages 297-312, 05.
    5. 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.
    6. Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
    7. Mosley, Paul, 1996. "The Failure of Aid and Adjustment Policies in Sub-Saharan Africa: Counter-Examples and Policy Proposals," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 406-43, October.
    8. Murshed, S Mansoob & Sen, Somnath, 1995. "Aid Conditionality and Military Expenditure Reduction in Developing Countries: Models of Asymmetric Information," Economic Journal, Royal Economic Society, vol. 105(429), pages 498-509, March.
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