Samaritans, Rotten Kids and Policy Conditionality
Donors who try to impose policy conditionality on countries receiving their aid commonly face conâ€¡icting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this conâ€¡ict can lead to a time-consistency problem. This paper oÂ¤ers a contractual analysis of conditionality, showing how conditionality contracts are aÂ¤ected by conâ€¡icting donor incentives in the presence of limited commitment power. Conditionality is shown to survive in an environment with weak donor commitment power, and it can eliminate the ineÂ¢ciency associated with the no-conditionality outcome. However, even when conditionality is successfully imposed by donors, there may be an inverse relationship between aid and reform across diÂ¤erent aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered.
|Date of creation:||01 Sep 2001|
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