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Collusion Among Interest Grops: Foreign Aid and Rent Dissipation

  • Svensson, Jakob

    ()

    (The World Bank)

This paper develops a game-theoretic model of public policy in a developing country in order to explain a number of empirical regularities. It is shown that under certain circumstances, an increase in government revenue will be completely crowded out by increased rent dissipation, leaving the provision of public goods unaltered. In this model, there are two possible ways in which foreign aid may affect the outcome. First, as foreign aid to a large extent can be seen as general budget support, the paper provides an explanation for why increased disbursements do not necessarily lead to higher provision of public goods. Second, the mere fact that the donor is expected to allocate aid according to the recipients' future needs may increase rent dissipation and reduce the number of periods in which efficient policies can be sustained.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 610.

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Length: 32 pages
Date of creation: 03 Nov 1997
Date of revision:
Publication status: Published in Journal of International Economics, 2000, pages 437-461.
Handle: RePEc:hhs:iiessp:0610
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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  1. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  2. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  4. Tornell, Aaron, 1997. " Economic Growth and Decline with Endogenous Property Rights," Journal of Economic Growth, Springer, vol. 2(3), pages 219-50, September.
  5. Tommasi, Mariano & Velasco, Andres, 1995. "Where are we in the Political Economy of Reform?," Working Papers 95-20, C.V. Starr Center for Applied Economics, New York University.
  6. Hirshleifer, Jack, 1995. "Anarchy and Its Breakdown," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 26-52, February.
  7. Svensson, Jakob, 1997. "When is Foreign Aid Policy Credible? - Aid Dependence and Conditionality," Seminar Papers 600, Stockholm University, Institute for International Economic Studies.
  8. Casella, Alessandra & Eichengreen, Barry, 1996. "Can Foreign Aid Accelerate Stabilisation?," Economic Journal, Royal Economic Society, vol. 106(436), pages 605-19, May.
  9. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  10. Mohammad, Sharif & Whalley, John, 1984. "Rent Seeking in India: Its Costs and Policy Significance," Kyklos, Wiley Blackwell, vol. 37(3), pages 387-413.
  11. Acemoglu, Daron & Verdier, Thierry, 1996. "Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach," CEPR Discussion Papers 1494, C.E.P.R. Discussion Papers.
  12. Joshua Aizenman, 1990. "Soft Budget Constraints, Taxes, and the Incentive to Cooperate," NBER Working Papers 3561, National Bureau of Economic Research, Inc.
  13. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  14. Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May.
  15. Klitgaard, Robert, 1989. "Incentive myopia," World Development, Elsevier, vol. 17(4), pages 447-459, April.
  16. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
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