Poverty and Governance: The Contest for Aid

Countries compete with one another for funds distributed by non‐government organizations (NGOs). The authors consider a competition over poverty and governance conducted by a non‐government organization trying to allocate its funds among potential recipient countries. In its decision‐making the NGO also takes into account the initial conditions each potential recipient faces, including the current quality of governance and wealth (poverty). For example, all else being equal the poorer country will have a higher probability of obtaining funds; or, the better the applicant's governance, the more its gains. Moreover, the maximum aid a country can obtain depends on its wealth. Investment in good governance, the wealth/poverty status of the applicant, and its current quality of governance will, together, determine the funds potential recipients expect to obtain. The authors also consider recent changes in the levels of these factors. They want to understand the roles these factors play in the competition for aid and the outcome for the quality of governance.