Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid

J. Atsu Amegashie, Bazoumana Ouattara and Eric Strobl ()

No 1996, CESifo Working Paper Series from CESifo

Abstract: The paper presents a theoretical and empirical analysis of a donor’s choice of the composition of unrestricted and in-kind/restricted transfers to a recipient and how this composition is adjusted in response to changes in the moral hazard behavior of the recipient. In-kind or restricted transfers may be used, among others, to control a recipient’s moral hazard behavior but may be associated with deadweight losses. Within the context of foreign aid, we use a canonical political agency model to construct a simple signaling game between a possibly corrupt politician in a recipient country and a donor to illustrate the donor’s optimal choice of tied (restricted) and untied foreign aid. We clarify the condition under which a reduction in the recipient’s moral hazard behavior (i.e., improvement in the level of governance) leads to a fall in the proportion of tied aid. We test the predictions of our theoretical analysis using data on the composition of foreign aid by multilateral and bilateral donors.

Keywords: tied foreign aid; governance; moral hazard; political agency; restricted transfer (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp1996.pdf (application/pdf)

Related works:
Working Paper: Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid (2009)
Working Paper: Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid (2007)
Working Paper: Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1996

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().