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Aid Effectiveness and Limited Enforceable Conditionality

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Author Info
Almuth Scholl (University of Konstanz)

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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)

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File URL: http://dx.doi.org/10.1016/j.red.2008.09.005
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

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Related research
Keywords: Foreign aid Conditionality Limited enforceability Dynamic contracts Neoclassical growth

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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
F35 - International Economics - - International Finance - - - Foreign Aid
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Weiner, 2005. "The Impact of Industry Classification Schemes on Financial Research," SFB 649 Discussion Papers SFB649DP2005-062, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  2. Wolfgang Härdle & Sigbert Klinke & Uwe Ziegenhagen, 2005. "Integrable e-lements for Statistics Education," SFB 649 Discussion Papers SFB649DP2005-058, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  3. Yasemin Boztug & Lutz Hildebrandt, 2005. "An empirical test of theories of price valuation using a semiparametric approach, reference prices, and accounting for heterogeneity," SFB 649 Discussion Papers SFB649DP2005-057, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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