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Aid and Corruption: Do Donors Use Development Assistance to Provide the “Right” Incentives?

In this paper, we focus on the determinants of the relationship between aid and corruption. We propose a static principal-agent model where a donor faces the problem of giving aid to a recipient country in which the phenomenon of corruption is widely spread. We distinguish among two different types of corruption: one, that we call endemic, that depends on the political and institutional environment of the recipient; the other, that we call aid related, is the consequence of moral hazard arising from the ability of corrupt burocracies to divert resources from their intended use. Through the design of appropriate contracts, donors can act only on the second type of corruption, contributing to reduce the entity of the phenomenon. We use the restrictions implied by our theoretical framework to test a model of aid allocation. For the majority of the donors (Germany, Italy, the Netherlands, Norway, Spain and the UK), we find some indication that efficiency considerations are taken into account in allocating aid. For some of them (Germany, Italy and the Netherlands), however, strategic/economic considerations are important, while the UK is also motivated by purely altruistic concerns. According to our model, Denmark and Japan are mainly driven by recipient needs, while the USA, and to a lesser extent France, allocate aid mainly on the basis of strategic/economic interests.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 121.

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Length: 31 pages
Date of creation: 14 Jul 2008
Date of revision: 14 Jul 2008
Handle: RePEc:rtv:ceisrp:121
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  1. Berthelemy, Jean-Claude & Tichit, Ariane, 2002. "Bilateral Donors' Aid Allocation Decisions: A Three-dimensional Panel Analysis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Dollar, David & Levin, Victoria, 2004. "Increasing selectivity of foreign aid, 1984-2002," Policy Research Working Paper Series 3299, The World Bank.
  3. Svensson, Jakob, 1998. "Foreign aid and rent-seeking," Policy Research Working Paper Series 1880, The World Bank.
  4. McGillivray, Mark, 2003. "Descriptive and Prescriptive Analyses of Aid Allocation: Approaches, Issues and Consequences," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Drew Fudenberg & Jean Tirole, 1988. "Moral Hazard and Renegotiation in Agency Contracts," Working papers 494, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  7. Isopi, Alessia & Mavrotas, George, 2006. "Aid Allocation and Aid Effectiveness: An Empirical Analysis," Working Paper Series RP2006/07, World Institute for Development Economic Research (UNU-WIDER).
  8. Alberto Alesina & Beatrice Weder, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," American Economic Review, American Economic Association, vol. 92(4), pages 1126-1137, September.
  9. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
  10. Francis Vella, 1998. "Estimating Models with Sample Selection Bias: A Survey," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 127-169.
  11. McGillivray, M. & White, H., 1993. "Explanatory studies of aid allocation among developing countries : a critical survey," ISS Working Papers - General Series 18942, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
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