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Aid Effectiveness and Limited Enforceable Conditionality

  • Almuth Scholl

This paper analyzes optimal foreign aid policy in a neoclassical framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modelled as a limited enforceable contract. We define conditional aid policy to be self-enforcing if, at any point in time, the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that the effectiveness of unconditional aid is low while self-enforcing conditional aid strongly stimulates the economy. However, increasing the welfare of the poor comes at high cost: to ensure aid effectiveness, less democratic political regimes receive permanently larger aid funds.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-054.

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Length: 48 pages
Date of creation: Jan 2005
Date of revision: Aug 2005
Handle: RePEc:hum:wpaper:sfb649dp2005-054
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