Why corrupt governments may receive more foreign aid
In this paper we argue that if the cross-country heterogeneity in productivity is more important than the heterogeneity in government quality, it can be optimal to give more foreign aid to more corrupt countries. We build a multi-country model of optimal aid in which we disentangle the correlation between aid and equilibrium corruption into two components: the ï¬rst one reï¬‚ects variations in the quality of institutions and the second encompasses variations in productivity levels. The data suggest that both components of the correlation are signiï¬cant, however the effect of variations in productivity levels is stronger. This implies that most corrupt countries, since they are also the poorest, receive higher amounts of foreign aid.
|Date of creation:||01 Oct 2009|
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