Good Donors or Good Recipients? A Repeated Moral Hazard Model of Aid Allocation
We propose a repeated moral hazard model with full commitment and limited punishment to study the problem of aid allocation in environments characterized by asymmetric information. The donor (principal) finances a three-period development program and the elite of the recipient country (agent), involved in the realization of the project, can affect the final output through adequate policies. The donor has the goal to help the poor of the recipient country, but she may also be conditioned by non altruistic motives. We show that when the moral hazard problem is relevant, under a wide set of parameter values, optimal aid contracts should be conditional on the previous result of the project. We distinguish between weak conditionality, which means that aid depends only on the previous performance of the project and strong conditionality, which means that aid depends on the whole history of the project. Unconditional aid may be an optimal contractual arrangement for the donor if the moral hazard issue is not very important or if the donor gives aid merely for strategic or economic reasons. An entirely altruistic donor will never provide unconditional aid. On the other hand, if she has a strong desire to help the recipient she should never deny aid to it.
|Date of creation:|
|Contact details of provider:|| Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD|
Phone: (44) 0115 951 5620
Fax: (0115) 951 4159
Web page: http://www.nottingham.ac.uk/economics/
More information through EDIRC
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.:
- Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
- Alesina, Alberto & Dollar, David, 2000.
"Who Gives Foreign Aid to Whom and Why?,"
Journal of Economic Growth,
Springer, vol. 5(1), pages 33-63, March.
- Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
- Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
- Svensson, Jakob, 2000.
"Foreign aid and rent-seeking,"
Journal of International Economics,
Elsevier, vol. 51(2), pages 437-461, August.
- Isopi, Alessia & Mavrotas, George, 2006. "Aid Allocation and Aid Effectiveness: An Empirical Analysis," WIDER Working Paper Series 007, World Institute for Development Economic Research (UNU-WIDER).
- Drew Fudenberg & Jean Tirole, 1988.
"Moral Hazard and Renegotiation in Agency Contracts,"
494, Massachusetts Institute of Technology (MIT), Department of Economics.
- Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
- Calmette, Marie-Francoise & Kilkenny, Maureen, 2001.
"International charity under asymmetric information,"
Elsevier, vol. 74(1), pages 107-111, December.
- Kilkenny, Maureen & Calmette, M., 2001. "International Charity Under Asymmetric Information," Staff General Research Papers Archive 5112, Iowa State University, Department of Economics.
- Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398, 04.
- William Easterly & Tobias Pfutze, 2008. "Where Does the Money Go? Best and Worst Practices in Foreign Aid," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 29-52, Spring.
- Dollar, David & Levin, Victoria, 2004. "Increasing selectivity of foreign aid, 1984-2002," Policy Research Working Paper Series 3299, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:not:notcre:09/10. 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: (Hilary Hughes)
If references are entirely missing, you can add them using this form.