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Aid Effectiveness and Limited Enforceable Conditionality

  • Almuth Scholl

    (University of Konstanz)

This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modeled as a limited enforceable dynamic contract. We define the contract to be self-enforcing if, at any point in time, the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that optimal self-enforcing conditional aid strongly stimulates the developing economy and substantially increases welfare. However, aid effectiveness comes at a high cost: to ensure enforceability, less benevolent political regimes receive permanently larger aid funds in return for a less intense conditionality. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2008.09.005
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 2 (April)
Pages: 377-391

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Handle: RePEc:red:issued:07-180
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