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

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  • S. Mansoob Murshed

Abstract

The author analyzes 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 his or her 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 cooperative behavior that is difficult to design. 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. Thus, thirdly, a simple model of signaling with commitment problems is presented, along with extensions to multiple types of agent and time periods, as well as possible solutions involving mechanism design. Copyright 2009 The Author. Journal compilation 2009 Blackwell Publishing Ltd.

Suggested Citation

  • S. Mansoob Murshed, 2009. "On the Non-Contractual Nature of Donor-Recipient Interaction in Development Assistance," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 416-428, August.
  • Handle: RePEc:bla:rdevec:v:13:y:2009:i:s1:p:416-428
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    References listed on IDEAS

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    1. 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 406-443, October.
    2. Martens,Bertin & Mummert,Uwe & Murrell,Peter & Seabright,Paul, 2008. "The Institutional Economics of Foreign Aid," Cambridge Books, Cambridge University Press, number 9780521055390, April.
    3. Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
    4. 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.
    5. Torsvik, Gaute, 2005. "Foreign economic aid; should donors cooperate?," Journal of Development Economics, Elsevier, vol. 77(2), pages 503-515, August.
    6. Murshed, S. Mansoob, 2004. "Strategic interaction and donor policy determination," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 311-323.
    7. 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.
    8. Avinash Dixit, 2003. "Some Lessons from Transaction-Cost Politics for Less-Developed Countries," Economics and Politics, Wiley Blackwell, vol. 15(2), pages 107-133, July.
    9. S. Mansoob Murshed, 2003. "Strategic Interaction, Aid Effectiveness And The Formation Of Aid Policies In Donor Nations," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 28(1), pages 189-203, June.
    10. 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.
    11. Tony Addison & S. Mansoob Murshed, 2002. "Credibility and Reputation in Peacemaking," Journal of Peace Research, Peace Research Institute Oslo, vol. 39(4), pages 487-501, July.
    12. 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, May.
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    Cited by:

    1. Oliveira Cruz, Valeria & McPake, Barbara, 2010. "The "aid contract" and its compensation scheme: A case study of the performance of the Ugandan health sector," Social Science & Medicine, Elsevier, vol. 71(7), pages 1357-1365, October.
    2. George Mavrotas, 2011. "Security and Development: Delving Deeper into the Nexus," Chapters,in: Security and Development, chapter 1 Edward Elgar Publishing.
    3. Lodewijk Smets & Stephen Knack & Nadia Molenaers, 2013. "Political ideology, quality at entry and the success of economic reform programs," The Review of International Organizations, Springer, vol. 8(4), pages 447-476, December.

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