When is Foreign Aid Policy Credible? - Aid Dependence and Conditionality
In spite a vast amount of both theoretical and empirical work on foreign assistance and development, little is known about the incentive effects of aid. In fact, recent surveys of aid only briefly mention the possibility of moral hazard situations in the recipient-donor relation, but conclude that conditionality is a way to deal with the problem. However, in this paper we show that an aid contract, as proposed in the literature, is not time-consistent. This may be one explanation for the poor results of the vast amount of foreign aid disbursed to the developing world. Moreover, we show that tied aid, or delegation to a donor agency with less aversion to poverty may improve the equilibrium for all parties in the discretionary environment. Finally, we provide some evidence supporting the basic idea of the paper, namely that aid induces weak fiscal discipline and that increased fiscal difficulties lead to higher inflow of aid.
|Date of creation:||05 Nov 1997|
|Date of revision:|
|Publication status:||Published in Journal of Development Economics, 2000, pages 61-84.|
|Contact details of provider:|| Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden|
Web page: http://www.iies.su.se/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Torsten Persson & Guido Tabellini, 1997.
"Political Economics and Macroeconomic Policy,"
NBER Working Papers
6329, National Bureau of Economic Research, Inc.
- Torsten Persson & Guido Tabellini, . "Political Economics and Macroeconomic Policy," Working Papers 121, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Persson, Torsten & Tabellini , Guido, 1997. "Political Economics and Macroeconomic Policy," Seminar Papers 630, Stockholm University, Institute for International Economic Studies.
- Persson, T. & Tabellini, G., 1997. "Political Economics and Macroeconomic Policy," Papers 630, Stockholm - International Economic Studies.
- Persson, Torsten & Tabellini, Guido, 1997. "Political Economics and Macroeconomic Policy," CEPR Discussion Papers 1759, C.E.P.R. Discussion Papers.
- János Kornai, 2014.
"The soft budget constraint,"
Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
- Dani Rodrik, 1995.
"Why is there Multilateral Lending?,"
NBER Working Papers
5160, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, 1990.
"Credibility and Stabilization,"
CEPR Discussion Papers
454, C.E.P.R. Discussion Papers.
- Breusch, T.S. & Pagan, A.R., .
"The Lagrange multiplier test and its applications to model specification in econometrics,"
CORE Discussion Papers RP
412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 239-253.
- Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
- Frey, Bruno S. & Schneider, Friedrich, 1986. "Competing models of international lending activity," Journal of Development Economics, Elsevier, vol. 20(2), pages 225-245, March.
- M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
- Coate, Stephen, 1995. "Altruism, the Samaritan's Dilemma, and Government Transfer Policy," American Economic Review, American Economic Association, vol. 85(1), pages 46-57, March.
- Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
- Trumbull, William N & Wall, Howard J, 1994. "Estimating Aid-Allocation Criteria with Panel Data," Economic Journal, Royal Economic Society, vol. 104(425), pages 876-82, July.
- Jean-Jacques Laffont, 1989. "The Economics of Uncertainty and Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121360, March.
- Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Pedersen, Karl R, 1996. " Aid, Investment and Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 423-38.
- Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
- Pedersen, K.R., 1993. "On Development Aid and Low-Investment Traps," Papers 08-93, Norwegian School of Economics and Business Administration-.
- Casella, Alessandra & Eichengreen, Barry, 1996.
"Can Foreign Aid Accelerate Stabilisation?,"
Royal Economic Society, vol. 106(436), pages 605-19, May.
- Alessandra Casella & Barry Eichengreen, 1994. "Can Foreign Aid Accelerate Stabilization?," NBER Working Papers 4694, National Bureau of Economic Research, Inc.
- Casella, Alessandra & Eichengreen, Barry, 1994. "Can Foreign Aid Accelerate Stabilization?," CEPR Discussion Papers 961, C.E.P.R. Discussion Papers.
- Feyzioglu, Tarhan & Swaroop, Vinaya & Min Zhu, 1996. "Foreign aid's impact on public spending," Policy Research Working Paper Series 1610, The World Bank.
- Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-82, December.
- Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
- Gang, Ira N. & Lehman, James A., 1990. "New directions or not: USAID in Latin America," World Development, Elsevier, vol. 18(5), pages 723-732, May.
- Griffin, Keith, 1970. "Foreign Capital, Domestic Savings and Economic Development," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 32(2), pages 99-112, May.
- Qian, Yingyi & Roland, Gérard, 1994. "Regional Decentralization and the Soft Budget Constraint: The Case of China," CEPR Discussion Papers 1013, C.E.P.R. Discussion Papers.
- Summers, Lawrence H & Pritchett, Lant H, 1993. "The Structural-Adjustment Debate," American Economic Review, American Economic Association, vol. 83(2), pages 383-89, May.
- Mosley, Paul, 1985. "The Political Economy of Foreign Aid: A Model of the Market for a Public Good," Economic Development and Cultural Change, University of Chicago Press, vol. 33(2), pages 373-93, January.
- Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September.
- Dudley, Leonard & Montmarquette, Claude, 1976. "A Model of the Supply of Bilateral Foreign Aid," American Economic Review, American Economic Association, vol. 66(1), pages 132-42, March.
When requesting a correction, please mention this item's handle: RePEc:hhs:iiessp:0600. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hanna Christiansson)
If references are entirely missing, you can add them using this form.