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Good governance and good aid allocation

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  • Epstein, Gil S.
  • Gang, Ira N.

Abstract

We model the aid allocation process as a rent-seeking contest between two countries and investigate the effects of differing allocation rules on recipients' behavior in a simple framework. We investigate the aid allocation mechanism design that attempts to increase the governance quality of potential recipient countries: the potential recipients spend costly resources improving governance, while the donor country allocates the fund based on their governance quality. The paper compares two mechanisms: one uses a simple winner-takes-all tournament to award the entire available purse to the country with the best governance; while under the other aid is distributed among countries in proportion to their governance qualities. The paper shows the second mechanism outperforms the first only if competing countries are sufficiently asymmetric. Moreover, the recipient who is most effective in governance - and stands to benefit the most from development assistance - has interests opposite to those of the donor. In addition, the paper shows that if the donor country allocates the fund based on both governance and the levels of poverty, it may result in a poverty trap: the leaders of potential recipient countries deliberately allocate funds away from the poorest so as not to better their position in order to receive more aid.

Suggested Citation

  • Epstein, Gil S. & Gang, Ira N., 2009. "Good governance and good aid allocation," Journal of Development Economics, Elsevier, vol. 89(1), pages 12-18, May.
  • Handle: RePEc:eee:deveco:v:89:y:2009:i:1:p:12-18
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    1. Mumtaz Anwar & Katharina Michaelowa, 2006. "The Political Economy of US Aid to Pakistan," Review of Development Economics, Wiley Blackwell, vol. 10(2), pages 195-209, May.
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    Cited by:

    1. Gaoussou Diarra & Patrick Plane, 2014. "Assessing the World Bank's Influence on the Good Governance Paradigm," Oxford Development Studies, Taylor & Francis Journals, vol. 42(4), pages 473-487, December.
    2. Carter, Patrick, 2014. "Aid allocation rules," European Economic Review, Elsevier, vol. 71(C), pages 132-151.
    3. Gil S. Epstein & Ira N. Gang, 2010. "A Political Economy of the Immigrant Assimilation: Internal Dynamics," Working Papers 2010-13, Bar-Ilan University, Department of Economics.
    4. Prabir De, 2010. "Does Governance Matter for Enhancing Trade? Empirical Evidence from Asia," Governance Working Papers 22792, East Asian Bureau of Economic Research.
    5. Terence M. Garrett & Arthur Sementelli, 2012. "Knowledge production: public management and the market spectacle," International Journal of Social Economics, Emerald Group Publishing, vol. 39(7), pages 456-473, June.
    6. Brech, Viktor & Potrafke, Niklas, 2014. "Donor ideology and types of foreign aid," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 61-75.
    7. repec:eee:ecolec:v:146:y:2018:i:c:p:435-446 is not listed on IDEAS
    8. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, Elsevier.
    9. Prabir De, 2010. "Governance, Institutions, and Regional Infrastructure in Asia," Governance Working Papers 22878, East Asian Bureau of Economic Research.
    10. Prabir De, 2010. "Governance, Institutions, and Regional Infrastructure in Asia," Working Papers id:3029, eSocialSciences.
    11. Gil S. Epstein & Yosef Mealem & Shmuel Nitzan, 2013. "Lotteries vs. All-Pay Auctions in Fair and Biased Contests," Economics and Politics, Wiley Blackwell, vol. 25(1), pages 48-60, March.
    12. Epstein, Gil S. & Gang, Ira N., 2014. "Making Aid Work: Governance and Decentralization," IZA Discussion Papers 8653, Institute for the Study of Labor (IZA).
    13. Prabir De, 2011. "Do institutions matter for trade in Asian countries?," STUDIES IN TRADE AND INVESTMENT,in: Trade-led growth: A sound strategy for Asia, chapter 9 United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    14. Lawrence Sáez, 2013. "Methods in governance research: a review of research approaches," Global Development Institute Working Paper Series esid-017-13, GDI, The University of Manchester.

    More about this item

    Keywords

    Foreign aid Governance Decentralization Rent seeking;

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • F35 - International Economics - - International Finance - - - Foreign Aid

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