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Samaritans, Rotten Kids and Policy Conditionality

  • Giulio Federico

    (Nuffield College,Oxford University)

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    Donors who try to impose policy conditionality on countries receiving their aid commonly face conflicting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this conflict can lead to a time-consistency problem.This paper offers a contractual analysis of conditionality, showing how conditionality contracts are affected by conflicting 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 inefficiency 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 different aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered.

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    Paper provided by EconWPA in its series Development and Comp Systems with number 0409004.

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    Length: 48 pages
    Date of creation: 08 Sep 2004
    Date of revision:
    Handle: RePEc:wpa:wuwpdc:0409004
    Note: Type of Document - pdf; pages: 48
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