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Special Interest Politics and Aid Fungibility

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  • Lahiri, Sajal
  • Raimondos-Møller, Pascalis

Abstract

We develop a political-economic model of aid fungibility. A donor country gives aid to a recipient government for the benefit of a target group. However, the recipient government accepts political contributions from a lobby group not targeted by the donor and transfers a fraction of the aid to the non-target group. The size of this fraction is determined endogenously in the political equilibrium in the recipient country. We examine how the donor's behaviour affects the equilibrium, and how changes in the parameters of the model affect the total amount of aid and the proportion of it reaching the target group.

Suggested Citation

  • Lahiri, Sajal & Raimondos-Møller, Pascalis, 2000. "Special Interest Politics and Aid Fungibility," CEPR Discussion Papers 2482, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2482
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    References listed on IDEAS

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    1. Lahiri, Sajal & Raimondos-Moller, Pascalis, 2000. "Lobbying by Ethnic Groups and Aid Allocation," Economic Journal, Royal Economic Society, vol. 110(462), pages 62-79, March.
    2. Wolfgang Mayer & Pascalis Raimondos-Møller, "undated". "The Politics of Foreign Aid," EPRU Working Paper Series 99-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    3. B. Douglas Bernheim & Michael D. Whinston, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(1), pages 1-31.
    4. Dexit, A. & Grossman, G.M. & Helpman, E., 1996. "Common Agency and Coordination: General Theory and Application to Tax Policy," Papers 11-96, Tel Aviv.
    5. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    6. Khilji, Nasir M. & Zampelli, Ernest M., 1994. "The fungibility of U.S. military and non-military assistance and the impacts on expenditures of major aid recipients," Journal of Development Economics, Elsevier, vol. 43(2), pages 345-362, April.
    7. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-985, December.
    8. Rama, Martin & Tabellim, Guido, 1998. "Lobbying by capital and labor over trade and labor market policies," European Economic Review, Elsevier, vol. 42(7), pages 1295-1316, July.
    9. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
    10. Rodrik, Dani, 1995. "Political economy of trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 28, pages 1457-1494 Elsevier.
    11. Ronald Findlay & Stanislaw Wellisz, 1982. "Endogenous Tariffs, the Political Economy of Trade Restrictions, and Welfare," NBER Chapters,in: Import Competition and Response, pages 223-244 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Carsten Hefeker, 2006. "Project Aid or Budget Aid? The Interests of Governments and Financial Institutions," Review of Development Economics, Wiley Blackwell, vol. 10(2), pages 241-252, May.
    2. Tito Cordella & Giovanni Dell'Ariccia, 2003. "Budget Support Versus Project Aid," IMF Working Papers 03/88, International Monetary Fund.

    More about this item

    Keywords

    Foreign Aid; Fungibility; Lobbying; Politics;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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