Do Foreign Aid Transfers Distort Incentives and Hurt Growth? Theory and Evidence from 75 Aid-recipient Countries
George Economides (),
Sarantis Kalyvitis () and
No 1156, CESifo Working Paper Series from CESifo Group Munich
In this paper, foreign aid transfers can distort individual incentives, and hence hurt growth, by encouraging rent-seeking as opposed to productive activities. We construct a model of a small growing open economy that distinguishes two effects from foreign transfers: (i) a direct positive effect, as higher transfers allow the financing of infrastructure; (ii) an indirect negative effect, as higher transfers induce rent-seeking competition on the part of self-interested individuals. In this framework, the growth impact of aid is examined jointly with the determination of rent-seeking behavior. We test the main predictions of the model for a cross-section of 75 aid-recipient countries between 1975 and 1995. There is evidence that aid has a direct positive effect on growth, which is however significantly mitigated by the adverse indirect effects of associated rent-seeking activities. This is especially the case in recipient countries with relatively large public sectors.
Keywords: foreign aid; incentives; growth (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1156
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Group Munich Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().