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Donor Strategy under the Fungibility of Foreign Aid

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  • Sajal Lahiri
  • Pascalis Raimondos-Møller

Abstract

We develop a political-economic model of aid fungibility: a part of aid is diverted away from its intended target by lobby groups. The size of this diversion - the degree of aid fungibility - is determined endogenously by the recipient government. The donor can affect the equilibrium degree of fungibility by choosing both the size of aid and the timing of its decision. We derive a condition under which the donor's reaction to fungibility is to reduce the amount of aid. Under this condition, if the donor acts as a follower, both the donor and the target group are better off. Copyright Blackwell Publishing Ltd 2004.

Suggested Citation

  • Sajal Lahiri & Pascalis Raimondos-Møller, 2004. "Donor Strategy under the Fungibility of Foreign Aid," Economics and Politics, Wiley Blackwell, vol. 16(2), pages 213-231, July.
  • Handle: RePEc:bla:ecopol:v:16:y:2004:i:2:p:213-231
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    Citations

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    Cited by:

    1. Tejashree Sayanak & Sajal Lahiri, 2009. "Foreign Aid as Prize: Incentives for a Pro-Poor Policy," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 403-415, August.
    2. Aurore Gary & Mathilde Maurel, 2013. "The effect of donors' policy coherence on growth," Documents de travail du Centre d'Economie de la Sorbonne 13046, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2006. "Agglomeration and Aid," CESifo Working Paper Series 1750, CESifo Group Munich.
    4. Dalgaard, Carl-Johan, 2008. "Donor policy rules and aid effectiveness," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1895-1920, June.
    5. Satya P. Das, 2011. "The political economy of revenue pressure and tax collection efficiency," Indian Growth and Development Review, Emerald Group Publishing, vol. 4(1), pages 38-52, April.
    6. Aurore Gary & Mathilde Maurel, 2015. "Donors’ Policy Consistency and Economic Growth," Kyklos, Wiley Blackwell, vol. 68(4), pages 511-551, November.
    7. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, Elsevier.
    8. Pincin, Jared, 2012. "Political power and aid tying practices in the development assistance committee countries," MPRA Paper 39463, University Library of Munich, Germany.
    9. Gil S. Epstein & Ira N. Gang, 2014. "Making Aid Work: Governance and Decentralization," Working Papers 2014-11, Bar-Ilan University, Department of Economics.
    10. Acharya, Arnab & Martínez-Álvarez, Melisa, 2012. "Aid Effectiveness in the Health Sector," WIDER Working Paper Series 069, World Institute for Development Economic Research (UNU-WIDER).
    11. Prabal Roy Chowdhury & Jaideep Roy, 2011. "Aid in times of terror," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 11-08, Indian Statistical Institute, New Delhi, India.
    12. Karim Barkat & Zouhair Mrabet & Mouyad Alsamara, 2016. "Does Official Development Assistance for health from developed countries displace government health expenditure in Sub-Saharan countries?," Economics Bulletin, AccessEcon, vol. 36(3), pages 1616-1635.
    13. Czaika, Mathias & Mayer, Amy, 2007. "Burden-sharing or migration management?," Proceedings of the German Development Economics Conference, Göttingen 2007 3, Verein für Socialpolitik, Research Committee Development Economics.
    14. Chatterjee, Santanu & Giuliano, Paola & Kaya, Ilker, 2007. "Where Has All the Money Gone? Foreign Aid and the Quest for Growth," IZA Discussion Papers 2858, Institute for the Study of Labor (IZA).
    15. Chatterjee Santanu & Giuliano Paola & Kaya Ilker, 2012. "Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, August.
    16. repec:unu:wpaper:wp2012-69 is not listed on IDEAS
    17. Hadjiyiannis, Costas & Hatzipanayotou, Panos & Michael, Michael S., 2013. "Competition for environmental aid and aid fungibility," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 1-11.
    18. Martínez Álvarez, Melisa & Borghi, Josephine & Acharya, Arnab & Vassall, Anna, 2016. "Is Development Assistance for Health fungible? Findings from a mixed methods case study in Tanzania," Social Science & Medicine, Elsevier, vol. 159(C), pages 161-169.
    19. repec:hal:journl:halshs-00825816 is not listed on IDEAS

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