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Donor Strategy under the Fungibility of Foreign Aid

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  • Sajal Lahiri
  • Pascalis Raimondos‐Møller

Abstract

We develop a political–economic model of aid fungibility: a part of aid is diverted away from its intended target by lobby groups. The size of this diversion – the degree of aid fungibility – is determined endogenously by the recipient government. The donor can affect the equilibrium degree of fungibility by choosing both the size of aid and the timing of its decision. We derive a condition under which the donor's reaction to fungibility is to reduce the amount of aid. Under this condition, if the donor acts as a follower, both the donor and the target group are better off.

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  • Sajal Lahiri & Pascalis Raimondos‐Møller, 2004. "Donor Strategy under the Fungibility of Foreign Aid," Economics and Politics, Wiley Blackwell, vol. 16(2), pages 213-231, July.
    • Handle: RePEc:bla:ecopol:v:16:y:2004:i:2:p:213-231
    DOI: 10.1111/j.1468-0343.2004.00138.x
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    2. Blanca Moreno Dodson & Grégoire Rota-Graziosi & Clémence Vergne, 2012. "Breaking the wave of democracy: The effect of foreign aid on the incumbent's re-election probability," Working Papers halshs-00722375, HAL.
    3. Tejashree Sayanak & Sajal Lahiri, 2009. "Foreign Aid as Prize: Incentives for a Pro‐Poor Policy," Review of Development Economics, Wiley Blackwell, vol. 13(3), pages 403-415, August.
    4. Prabal Roy Chowdhury & Jaideep Roy, 2011. "Aid in times of terror," Discussion Papers 11-08, Indian Statistical Institute, Delhi.
    5. Karim Barkat & Zouhair Mrabet & Mouyad Alsamara, 2016. "Does Official Development Assistance for health from developed countries displace government health expenditure in Sub-Saharan countries?," Economics Bulletin, AccessEcon, vol. 36(3), pages 1616-1635.
    6. Chatterjee, Santanu & Giuliano, Paola & Kaya, Ilker, 2007. "Where Has All the Money Gone? Foreign Aid and the Quest for Growth," IZA Discussion Papers 2858, Institute of Labor Economics (IZA).
    7. Chatterjee Santanu & Giuliano Paola & Kaya Ilker, 2012. "Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, August.
    8. Gil S. Epstein & Ira N. Gang, 2014. "Making Aid Work: Governance and Decentralization," Working Papers 2014-11, Bar-Ilan University, Department of Economics.
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    10. Hadjiyiannis, Costas & Hatzipanayotou, Panos & Michael, Michael S., 2013. "Competition for environmental aid and aid fungibility," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 1-11.
    11. Martínez Álvarez, Melisa & Borghi, Josephine & Acharya, Arnab & Vassall, Anna, 2016. "Is Development Assistance for Health fungible? Findings from a mixed methods case study in Tanzania," Social Science & Medicine, Elsevier, vol. 159(C), pages 161-169.
    12. Aurore Gary & Mathilde Maurel, 2013. "The effect of donors' policy coherence on growth," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00825816, HAL.
    13. Aurore Gary & Mathilde Maurel, 2015. "Donors’ Policy Consistency and Economic Growth," Kyklos, Wiley Blackwell, vol. 68(4), pages 511-551, November.
    14. Arnab Acharya & Melisa Martínez-Álvarez, 2012. "Aid Effectiveness in the Health Sector," WIDER Working Paper Series wp-2012-069, World Institute for Development Economic Research (UNU-WIDER).
    15. Elisabeth Paul, 2006. "A Survey of the Theoretical Economic Literature on Foreign Aid," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 20(1), pages 1-17, May.
    16. Steven Brakman & Harry Garretsen & Charles van Marrewijk & Charles van Marrewijk, 2006. "Agglomeration and Aid," CESifo Working Paper Series 1750, CESifo.
    17. Dalgaard, Carl-Johan, 2008. "Donor policy rules and aid effectiveness," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1895-1920, June.
    18. Satya P. Das, 2011. "The political economy of revenue pressure and tax collection efficiency," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 4(1), pages 38-52, April.
    19. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4415-4523, Elsevier.
    20. Pincin, Jared, 2012. "Political power and aid tying practices in the development assistance committee countries," MPRA Paper 39463, University Library of Munich, Germany.
    21. Acharya, Arnab & Martínez-Álvarez, Melisa, 2012. "Aid Effectiveness in the Health Sector," WIDER Working Paper Series 069, World Institute for Development Economic Research (UNU-WIDER).
    22. Czaika, Mathias & Mayer, Amy, 2007. "Burden-sharing or migration management?," Proceedings of the German Development Economics Conference, Göttingen 2007 3, Verein für Socialpolitik, Research Committee Development Economics.
    23. Mukherjee Vivekananda & Rübbelke Dirk & Stahlke Theresa & Brumme Anja, 2022. "Allocation of Adaptation Aid: A Normative Theory," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 242(4), pages 471-499, August.
    24. Ravetti, Chiara & Sarr, Mare & Swanson, Tim, 2018. "Foreign aid and political instability in resource-rich countries," Resources Policy, Elsevier, vol. 58(C), pages 277-294.
    25. Blanca Moreno Dodson & Grégoire Rota-Graziosi & Clémence Vergne, 2012. "Breaking the wave of democracy: The effect of foreign aid on the incumbent's re-election probability," CERDI Working papers halshs-00722375, HAL.

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