Donor Strategy under the Fungibility of Foreign Aid

Sajal Lahiri and Pascalis Raimondos ()

Economics and Politics, 2004, vol. 16, issue 2, 213-231

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.

Date: 2004
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https://doi.org/10.1111/j.1468-0343.2004.00138.x

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