Aid Effectiveness and Limited Enforceable Conditionality

Almuth Scholl

Review of Economic Dynamics, 2009, vol. 12, issue 2, 377-391

Abstract: This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modeled as a limited enforceable dynamic contract. We define the contract 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 optimal self-enforcing conditional aid strongly stimulates the developing economy and substantially increases welfare. However, aid effectiveness comes at a high cost: to ensure enforceability, less benevolent political regimes receive permanently larger aid funds in return for a less intense conditionality. (Copyright: Elsevier)

Keywords: Foreign aid; Conditionality; Limited enforceability; Dynamic contracts; Neoclassical growth (search for similar items in EconPapers)
JEL-codes: E13 F35 O11 O19 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (30)

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DOI: 10.1016/j.red.2008.09.005

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