IDEAS home Printed from https://ideas.repec.org/p/rtv/ceisrp/121.html
   My bibliography  Save this paper

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

Author

Abstract

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.

Suggested Citation

  • Alessia Isopi & Fabrizio Mattesini, 2008. "Aid and Corruption: Do Donors Use Development Assistance to Provide the “Right” Incentives?," CEIS Research Paper 121, Tor Vergata University, CEIS, revised 14 Jul 2008.
  • Handle: RePEc:rtv:ceisrp:121
    as

    Download full text from publisher

    File URL: ftp://www.ceistorvergata.it/repec/rpaper/RP121.pdf
    File Function: Main text
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. Svensson, Jakob, 2000. "Foreign aid and rent-seeking," Journal of International Economics, Elsevier, vol. 51(2), pages 437-461, August.
    3. 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.
    4. 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).
    5. McGillivray, Mark, 2004. "Descriptive and prescriptive analyses of aid allocation: Approaches, issues, and consequences," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 275-292.
    6. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
    7. 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.
    8. Berthelemy, Jean-Claude & Tichit, Ariane, 2004. "Bilateral donors' aid allocation decisions--a three-dimensional panel analysis," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 253-274.
    9. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    10. Dollar, David & Levin, Victoria, 2004. "Increasing selectivity of foreign aid, 1984-2002," Policy Research Working Paper Series 3299, The World Bank.
    11. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lauren E. Lopez, 2015. "Corruption And International Aid Allocation: A Complex Dance," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 40(1), pages 35-61, March.
    2. Pedrosa-Garcia, Jose Antonio, 2017. "Trends and Features of Research on Foreign Aid: A Literature Review," MPRA Paper 82134, University Library of Munich, Germany.
    3. Öhler, Hannes & Nunnenkamp, Peter & Dreher, Axel, 2012. "Does conditionality work? A test for an innovative US aid scheme," European Economic Review, Elsevier, vol. 56(1), pages 138-153.
    4. Matt Andrews, 2015. "Has Sweden Injected Realism into Public Financial Management Reforms in Partner Countries?," CID Working Papers 303, Center for International Development at Harvard University.
    5. Wako, Hassen, 2016. "Aid, institutions and economic growth: Heterogeneous parameters and heterogeneous donors," MERIT Working Papers 009, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    6. Winters, Matthew S. & Martinez, Gina, 2015. "The Role of Governance in Determining Foreign Aid Flow Composition," World Development, Elsevier, vol. 66(C), pages 516-531.
    7. James Vreeland, 2011. "Foreign aid and global governance: Buying Bretton Woods – the Swiss-bloc case," The Review of International Organizations, Springer, vol. 6(3), pages 369-391, September.
    8. Axel Dreher & Andreas Fuchs, 2011. "Rogue Aid? The Determinants of China's Aid Allocation," CESifo Working Paper Series 3581, CESifo Group Munich.
    9. Hodler, Roland & Dreher, Axel, 2013. "Development (paradigm) failures," Journal of Development Economics, Elsevier, vol. 101(C), pages 63-74.
    10. Lee, Suejin A. & Lim, Jae-Young, 2014. "Does International Health Aid Follow Recipients’ Needs? Extensive and Intensive Margins of Health Aid Allocation," World Development, Elsevier, vol. 64(C), pages 104-120.
    11. Andrews, Matt, 2015. "Has Sweden Injected Realism into Public Financial Management Reforms in Partner Countries?," Working Paper Series 15-063, Harvard University, John F. Kennedy School of Government.

    More about this item

    Keywords

    Aid Allocation; Corruption; Moral Hazard.;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rtv:ceisrp:121. 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: (Barbara Piazzi). General contact details of provider: http://edirc.repec.org/data/csrotit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.