Working Paper: CEPR ID: DP11443
Authors: Axel Dreher; Sarah Langlotz; Silvia Marchesi
Abstract: We investigate the degree of leeway donors of foreign aid should grant to recipient governments when their preferences over how to implement the aid are different, and both the donor and recipient possess some private information about the most effective policies. Intuitively, our model shows that donors should stay in control of how their aid is spent when their own private information is more important than the private information of the recipient. Less obviously, an increase in the difference of preferences between donors and recipients can increase rather than decrease the leeway that donors should grant the recipients, as the recipients' information gains in importance relative to those of the donors, and recipients become less likely to communicate truthfully. We test the model using dyadic data for 28 bilateral aid donors and 112 recipients, over the 1995-2010 period. Our proxy for "centralized" aid is project aid, while budget aid leaves more leeway to the recipient and thus proxies for "decentralized" aid. In line with the model, misaligned interests and informational asymmetries indeed influence the shares of aid given as budget and project aid.
Keywords: delegation; communication; ownership; foreign aid
JEL Codes: C23; D82; F33; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misaligned interests and informational asymmetries (D82) | allocation of aid types (project vs. budget aid) (F35) |
| increase in the difference in preferences between donors and recipients (D64) | increase leeway granted to recipients (I38) |
| recipient's information becomes more important (F35) | delegation should be favored (D72) |
| donor's information is more relevant (F35) | centralization should be preferred (H77) |
| agency bias (L85) | reduce or increase delegation (H77) |