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

Author

Listed:
  • Hannes Öhler
  • Peter Nunnenkamp
  • Axel Dreher

Abstract

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

Suggested Citation

  • Hannes Öhler & Peter Nunnenkamp & Axel Dreher, 2010. "Does Conditionality Work? A Test for an Innovative US Aid Scheme," Kiel Working Papers 1630, Kiel Institute for the World Economy.
  • Handle: RePEc:kie:kieliw:1630
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    File URL: https://www.ifw-members.ifw-kiel.de/publications/does-conditionality-work-a-test-for-an-innovative-us-aid-scheme/kwp_1630.pdf
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    More about this item

    Keywords

    Foreign Aid; Corruption; Millennium Challenge Corporation; MCC Effect;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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