Foreign aid and rent-seeking
AbstractTo address the relationship between concessional assistance, corruption, and other types of rent-seeking activities, the author provides a simple game-theoretic rent-seeking model. Insights with interesting implications emerge from the analysis: 1) An increase in government revenue (from windfalls, for example, or from increased foreign aid) does not necessarily lead to the provision of more public goods and in certain circumstances may reduce it. 2) The mere expectation of aid may suffice to increase rent-dissipation and reduce productive public spending. But if the donor community can enter into a binding policy commitment, this result may be reversed. The author provides some preliminary empirical evidence in support of the hypothesis that windfalls and foreign aid, in countries suffering from a divided policy process, are on average associated with more extensive corruption. He finds no evidence that donors systematically allocate aid to countries with less corruption. The results accords with recent empirical findings that aid is more effective, the greater the effort to direct it to good performers. But such a regime shift may involve an aid policy that in the short run provides more assistance to countries in less need and less aid to those in most need. Enforcing such a regime shift might be difficult.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 1880.
Date of creation: 28 Feb 1998
Date of revision:
Environmental Economics&Policies; Development Economics&Aid Effectiveness; Decentralization; Gender and Development; Economic Theory&Research; Economic Theory&Research; Environmental Economics&Policies; Governance Indicators; Inequality; Development Economics&Aid Effectiveness;
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