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Samaritans, Rotten Kids and Policy Conditionality

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  • Giulio Federico

    (Nuffield College,Oxford University)

Abstract

Donors who try to impose policy conditionality on countries receiving their aid commonly face conflicting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this conflict can lead to a time-consistency problem.This paper offers a contractual analysis of conditionality, showing how conditionality contracts are affected by conflicting 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 inefficiency 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 different aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered.

Suggested Citation

  • Giulio Federico, 2004. "Samaritans, Rotten Kids and Policy Conditionality," Development and Comp Systems 0409004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpdc:0409004
    Note: Type of Document - pdf; pages: 48
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    More about this item

    Keywords

    foreign aid; conditionality; altruism.;
    All these keywords.

    JEL classification:

    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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