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Does Conditionality Work? A Test for an Innovative US Aid Scheme

  • Hannes Öhler

    (Georg-August-University Göttingen)

  • Peter Nunnenkamp

    (Kiel Institute for the World Economy)

  • Axel Dreher

    (Georg-August-University Göttingen)

Performance-based aid has been proposed as an alternative to the failed traditional approach whereby donors make aid conditional on the reform promises of recipient countries. However, hardly any empirical evidence exists on whether ex post rewards are effective in inducing reforms. We attempt to fill this gap by investigating whether the Millennium Challenge Corporation (MCC) was successful in promoting better control of corruption. We employ a difference-in-difference-in-differences (DDD) approach, considering different ways of defining the treatment group as well as different time periods during which incentive effects could have materialized. We find evidence of strong anticipation effects immediately after the announcement of the MCC, while increasing uncertainty about the timing and amount of MCC aid appear to weaken the incentive to fight corruption over time. We conclude that – if designed properly – conditionality can work.

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Paper provided by Courant Research Centre PEG in its series Courant Research Centre: Poverty, Equity and Growth - Discussion Papers with number 34.

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Date of creation: 15 Jun 2010
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Handle: RePEc:got:gotcrc:034
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