Aid Effectiveness and Limited Enforceable Conditionality

Almuth Scholl

No 292, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: 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

Keywords: foreign aid; conditionality; limited enforceable contracts; growth; sovereignty (search for similar items in EconPapers)
JEL-codes: E13 F35 O1 O19 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-afr, nep-dev and nep-mac
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Related works:
Journal Article: Aid Effectiveness and Limited Enforceable Conditionality (2009)
Working Paper: Aid effectiveness and limited enforceable conditionality (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:292

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