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The optimal sequencing of carrots

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  • Steele, Jennifer L.

Abstract

When aid organizations contract with local agents aid funds have the potential to be diverted to purposes other than the intended project. A multi-stage game is presented where the benefit from the project is cumulative, with the application of funds in each stage increasing both the agent's and the organization's benefit from the project. As the agent's utility of diversion increases, the allocation in each stage decreases and the project takes more stages to complete. When contracting with agents with high utilities of diversion the optimal contract involves bloated projects and a side payment to the agent upon completion. If the organization's commitment to the contract is not credible both the agent's and the organization's benefit is reduced.

Suggested Citation

  • Steele, Jennifer L., 2010. "The optimal sequencing of carrots," Journal of Development Economics, Elsevier, vol. 93(1), pages 1-6, September.
  • Handle: RePEc:eee:deveco:v:93:y:2010:i:1:p:1-6
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    References listed on IDEAS

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    1. Leslie M. Marx & Steven A. Matthews, 2000. "Dynamic Voluntary Contribution to a Public Project," Review of Economic Studies, Oxford University Press, vol. 67(2), pages 327-358.
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    3. David A. Malueg, 1988. "Repeated Insurance Contracts with Differential Learning," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 177-181.
    4. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-1089, July.
    5. Marcet, Albert & Marimon, Ramon, 1992. "Communication, commitment, and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 219-249, December.
    6. Anat R. Admati & Motty Perry, 1991. "Joint Projects without Commitment," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 259-276.
    7. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
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