Does aid harm or benefit institutional quality? Time heals all wounds

Michael Chletsos and Sofia Tsarsitalidou

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Previous research has found conflicting results regarding the effect of aid on the quality of institutions, with some studies find-ing a positive relationship, whereas others finding a negative one. In this paper, we try to reconcile these results. In a dynamicregression discontinuity design, we explore the dynamics of the above relationship. Using the threshold of aid allocation of theInternational Development Association and a sample of approximately 100 countries over the 1989–2022 period, we provideevidence that aid has a differential impact on the quality of institutions depending on the time frame. We argue that there is anaid expropriation effect in the short run, as individuals try to expropriate aid revenues, ultimately harming domestic institutions.However, when the development effect of international aid kicks in, and after a few years, there is a positive effect on institutionalquality.

Keywords: foreign aid; quality of institutions; regression discontinuity (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Date: 2026-09-11
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Published in Review of Development Economics, 11, September, 2026. ISSN: 1363-6669

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