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The optimal sequencing of carrots

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  • Steele, Jennifer L.

Abstract

When aid organizations contract with local agents aid funds have the potential to be diverted to purposes other than the intended project. A multi-stage game is presented where the benefit from the project is cumulative, with the application of funds in each stage increasing both the agent's and the organization's benefit from the project. As the agent's utility of diversion increases, the allocation in each stage decreases and the project takes more stages to complete. When contracting with agents with high utilities of diversion the optimal contract involves bloated projects and a side payment to the agent upon completion. If the organization's commitment to the contract is not credible both the agent's and the organization's benefit is reduced.

Suggested Citation

  • Steele, Jennifer L., 2010. "The optimal sequencing of carrots," Journal of Development Economics, Elsevier, vol. 93(1), pages 1-6, September.
    • Handle: RePEc:eee:deveco:v:93:y:2010:i:1:p:1-6
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    References listed on IDEAS

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    1. Leslie M. Marx & Steven A. Matthews, 2000. "Dynamic Voluntary Contribution to a Public Project," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 327-358.
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    7. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    8. Burnside, Craig & Dollar, David, 2004. "Aid, policies, and growth : revisiting the evidence," Policy Research Working Paper Series 3251, The World Bank.
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    Cited by:

    1. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.

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