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Why Corrupt Governments May Receive More Foreign Aid

Author

Listed:
  • David DE LA CROIX

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and CORE)

  • Clara DELAVALLADE

    (Abdul Latif Jameel Poverty Action Lab)

Abstract

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 first one reflects variations in the quality of institutions and the second encompasses variations in productivity levels. The data suggest that both components of the correlation are significant, 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.

Suggested Citation

  • David DE LA CROIX & Clara DELAVALLADE, 2009. "Why Corrupt Governments May Receive More Foreign Aid," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2009033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2009033
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2009033.pdf
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    References listed on IDEAS

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    1. Sascha Becker & Peter Egger, 2007. "Endogenous Product versus Process Innovation and a Firm’s Propensity to Export," CESifo Working Paper Series 1906, CESifo Group Munich.
    2. Davide Castellani & Antonello Zanfei, 2006. "Multinational Firms, Innovation and Productivity," Books, Edward Elgar Publishing, number 3709, April.
    3. Carrasco, Raquel, 2001. "Binary Choice with Binary Endogenous Regressors in Panel Data: Estimating the Effect of Fertility on Female Labor Participation," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 385-394, October.
    4. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    5. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
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    Cited by:

    1. Iqbal, Nasir & Daly, Vince, 2014. "Rent seeking opportunities and economic growth in transitional economies," Economic Modelling, Elsevier, vol. 37(C), pages 16-22.
    2. Simplice A. Asongu & Jacinta C. Nwachukwu, 2016. "Foreign aid and governance in Africa," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 69-88, January.
    3. Aurore Gary & Audrey-Rose Menard, 2015. "Aid, Trade and Migration : How are OECD countries policies connected in times of crisis?," Working Papers of BETA 2015-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. Menard, Audrey-Rose & Weill, Laurent, 2016. "Understanding the link between aid and corruption: A causality analysis," Economic Systems, Elsevier, vol. 40(2), pages 260-272.
    5. Winters, Matthew S. & Martinez, Gina, 2015. "The Role of Governance in Determining Foreign Aid Flow Composition," World Development, Elsevier, vol. 66(C), pages 516-531.

    More about this item

    Keywords

    Corruption; Aid; Government spending; Institutions;

    JEL classification:

    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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