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Samaritans, Rotten Kids and Policy Conditionality

Author

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  • Giulio Federico

Abstract

Donors who try to impose policy conditionality on countries receiving their aid commonly face conflicting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this conflict can lead to a time-consistency problem. This paper offers a contractual analysis of conditionality, showing how conditionality contracts are affected by conflicting donor incentives in the presence of limited commitment power. Conditionality is shown to survive in an environment with weak donor commitment power, and it can eliminate the inefficiency associated with the no-conditionality outcome. However, even when conditionality is successfully imposed by donors, there may be an inverse relationship between aid and reform across different aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered.

Suggested Citation

  • Giulio Federico, 2001. "Samaritans, Rotten Kids and Policy Conditionality," CSAE Working Paper Series 2001-16, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2001-16
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    File URL: http://www.csae.ox.ac.uk/materials/papers/2001-16text.pdf
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    Cited by:

    1. Kletzer, Kenneth, 2005. "Aid and Sanctions," Santa Cruz Department of Economics, Working Paper Series qt5hq5d9gp, Department of Economics, UC Santa Cruz.
    2. Almuth Scholl, 2009. "Aid Effectiveness and Limited Enforceable Conditionality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 377-391, April.
    3. Rodney Ramcharan, 2004. "Debt “Hold Up†and International Lending," Econometric Society 2004 Far Eastern Meetings 462, Econometric Society.
    4. Rodney Ramcharan, 2004. "Debt Hold Up and International Lending," Econometric Society 2004 North American Summer Meetings 341, Econometric Society.
    5. Rodney Ramcharan, 2002. "How Does Conditional Aid (Not) Work?," IMF Working Papers 02/183, International Monetary Fund.
    6. Rodney Ramcharan, 2003. "Reputation, Debt, and Policy Conditionality," IMF Working Papers 03/192, International Monetary Fund.

    More about this item

    Keywords

    foreign aid; conditionality; altruism;

    JEL classification:

    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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