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Intermediation by aid agencies

  • Colin Rowat and Paul Seabright

This paper models aid agencies as financial intermediaries that do not make a financial return to depositors, whose concern is to transfer resources to investor-beneficiaries. This leads to a problem of verifying that the agency is using donations as intended. One solution to this problem is for an agency to employ altruistic workers at below-market wages: altruistic workers, who can monitor the agency's activities, would not work at below-market rates unless it were genuinely transferring resources to beneficiaries. We consider conditions for this solution to be incentive compatible. In a model with pure moral hazard, observability of wages makes incorporation as a not-for-profit firm redundant as a commitment device. In a model with both moral hazard and adverse selection, incorporation as a not-for-profit firm can serve as a costly commitment mechanism reassuring donors against misuse of their funds. Hiring a worker of low ability can also be a valuable commitment device against fraud.

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File URL: ftp://ftp.bham.ac.uk/pub/RePEc/pdf/080508JDEaid.pdf
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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 05-16.

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Length: 30 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:bir:birmec:05-16
Contact details of provider: Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk

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  1. Reinikka, Ritva & Svensson, Jakob, 2004. "Working for God?," CEPR Discussion Papers 4214, C.E.P.R. Discussion Papers.
  2. Handy, Femida & Katz, Eliakim, 1998. "The Wage Differential between Nonprofit Institutions and Corporations: Getting More by Paying Less?," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 246-261, June.
  3. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
  4. Tim Besley & Maitreesh Ghatak, 2005. "Competition and incentives with motivated agents," LSE Research Online Documents on Economics 928, London School of Economics and Political Science, LSE Library.
  5. Christopher Ruhm & Carey Borkoski, 2000. "Compensation in the Nonprofit Sector," NBER Working Papers 7562, National Bureau of Economic Research, Inc.
  6. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  7. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  8. H. Naci Mocan & Erdal Tekin, 2000. "Nonprofit Sector and Part-Time Work: An Analysis of Employer-Employee Matched Data of Child Care Workers," NBER Working Papers 7977, National Bureau of Economic Research, Inc.
  9. Preston, Anne E, 1989. "The Nonprofit Worker in a For-Profit World," Journal of Labor Economics, University of Chicago Press, vol. 7(4), pages 438-63, October.
  10. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
  11. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
  12. Edward L. Glaeser & Andrei Shleifer, 1998. "Not-For-Profit Entrepreneurs," NBER Working Papers 6810, National Bureau of Economic Research, Inc.
  13. Patrick Francois, 2002. "Not-for-profit Provision of Public Services," The Centre for Market and Public Organisation 02/060, Department of Economics, University of Bristol, UK.
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