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Aid Allocation Rules

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  • Patrick Carter

Abstract

This paper studies the aid allocation rule used by major development agencies, and investigates optimal allocations when recipients are neoclassical economies undergoing transition dynamics. When recipients face aid absorption constraints, allocations that favor poorer recipients are not always optimal, contrary to what is assumed in assessments of donor performance. The most quantitatively significant determinants of the optimal sensitivity to recipient characteristics are the generosity of the aid budget and the extent of absorption constraints. In neoclassical recipients aid can only accelerate growth where there is already growth, so the optimal rule places little weight on growth and optimality is largely a matter of balancing recipient need against absorption constraints.

Suggested Citation

  • Patrick Carter, 2012. "Aid Allocation Rules," Bristol Economics Discussion Papers 12/630, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:12/630
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    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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