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Foreign aid and fiscal behavior in a bounded rationality model: Different policy regimes

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  • Ira N. Gang

    () (Economics Department, Rutgers University, 75 Hamilton St, New Brunswick, NJ 08901-1248, USA)

  • Haider Ali Khan

    () (Graduate School of International Studies, University of Denver, Ben Cherrington, Denver, CO 80210, USA)

Abstract

We examine how the source of foreign aid affects the composition of the recipient government's spending. Does the source of aid - bilateral or multilateral - influence recipient policy-makers' choice between development and nondevelopment expenditure? We depart from previous literature by introducing strong asymmetries in policy-makers' preferences. With the financial constraints set by foreign aid and domestic revenues, this formalization allows us to model and estimate the fiscal behavior of government policy-makers in the presence of foreign aid.

Suggested Citation

  • Ira N. Gang & Haider Ali Khan, 1999. "Foreign aid and fiscal behavior in a bounded rationality model: Different policy regimes," Empirical Economics, Springer, vol. 24(1), pages 121-134.
  • Handle: RePEc:spr:empeco:v:24:y:1999:i:1:p:121-134
    Note: received: September 1996 / final version received: April 1998
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    1. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-237, April.
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    6. Cashel-Cordo, Peter & Craig, Steven G, 1997. "Donor Preferences and Recipient Fiscal Behavior: A Simultaneous Analysis of Foreign Aid," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 653-671, July.
    7. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-445, June.
    8. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
    9. Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October.
    10. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-641, September.
    11. Frey, Bruno S. & Schneider, Friedrich, 1986. "Competing models of international lending activity," Journal of Development Economics, Elsevier, vol. 20(2), pages 225-245, March.
    12. Binh, Tran-Nam & McGillivray, Mark, 1993. "Foreign aid, taxes and public investment A comment," Journal of Development Economics, Elsevier, vol. 41(1), pages 173-176, June.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Europe needs another Marshall Plan to save crisis-ravaged euro
      by Haider Khan, John Evans Distinguished University Professor at University of Denver in The Conversation on 2015-04-28 15:00:14

    Citations

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    Cited by:

    1. Ouattara, B., 2006. "Foreign aid and government fiscal behaviour in developing countries: Panel data evidence," Economic Modelling, Elsevier, vol. 23(3), pages 506-514, May.
    2. José Antonio Alonso & Carlos Garcimartín, "undated". "Does Aid Hinder Tax Efforts? More Evidence," Discussion Papers 11/04, University of Nottingham, CREDIT.
    3. Mark McGillivray, 2009. "Aid, Economic Reform, and Public Sector Fiscal Behavior in Developing Countries," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 526-542, August.
    4. Haider Ali Khan, 2003. "General Conclusions: From Crisis to A Global Political Economy of Freedom," CIRJE F-Series CIRJE-F-192, CIRJE, Faculty of Economics, University of Tokyo.
    5. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, vol. 35(3), pages 439-453, March.
    6. Bazoumana Ouattara, 2006. "Aid, debt and fiscal policies in Senegal," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1105-1122.
    7. Simon Feeny, 2006. "Policy preferences in fiscal response studies," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1167-1175.
    8. 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.
    9. Khan, Haider, 2013. "Globalization and Democracy: A Short Introduction," MPRA Paper 49515, University Library of Munich, Germany.
    10. Sadegh Bakhtiari & Hojjat Izadkhasti & Seyed Komail Tayebi, 2013. "Crowding out Effect of Foreign Aid in Selected Developing Countries: Panel Data Evidence," Iranian Economic Review, Economics faculty of Tehran university, vol. 18(2), pages 51-64, spring.
    11. Feeny, Simon & McGillivray, Mark, 2010. "Aid and public sector fiscal behaviour in failing states," Economic Modelling, Elsevier, vol. 27(5), pages 1006-1016, September.
    12. McGillivray, Mark & Morrissey, Oliver, 2001. "Fiscal Effects of Aid," WIDER Working Paper Series 061, World Institute for Development Economic Research (UNU-WIDER).
    13. B Ouattara, 2004. "Does Aid Promote Fiscal Indiscipline? Evidence from Dynamic Panel Model," The School of Economics Discussion Paper Series 0407, Economics, The University of Manchester.
    14. Gil S. Epstein & Ira N Gang, 2006. "The Hope for Hysteresis in Foreign Aid," Departmental Working Papers 200628, Rutgers University, Department of Economics.
    15. George Mavrotas & Bazoumana Ouattara, 2007. "Aid Modalities and Budgetary Response: Panel Data Evidence," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(4), pages 720-741, December.

    More about this item

    Keywords

    Foreign aid · India;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • F35 - International Economics - - International Finance - - - Foreign Aid

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