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Aid Effectiveness and Limited Enforceable Conditionality

  • Almuth Scholl

    ()

    (Economics, Institute of Economic Policy Humboldt University Berlin)

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 a high cost: to ensure aid effectiveness, less democratic political regimes have to receive permanently larger aid funds

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 292.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:292
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