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Foreign Aid and Policies under Asymmetric Information

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  • L. Montanari

Abstract

It is often difficult for external agents understanding to what extent the preferences of a government are directed towards welfare enhancing policies and reforms. I develop a principal-agent model in which a domestic lobby attempts to in.uence the government.s policy choices by means of monetary transfers while the weight the government attaches to public welfare is private information. I observe that asymmetric information generally leads to a larger policy distortion in equilibrium. This simple setting serves as a benchmark for the comparison with a commom agency framework. An International Financial Institution giving policy conditional aid to the government is included as an additional principle in the analysis. Its policy objective is in conflict with the lobby's one. Whether the equilibrium distortion results lower or higher depends on the range of uncertainty over the government's preferences and on the degree of benevolence of the government.

Suggested Citation

  • L. Montanari, 2008. "Foreign Aid and Policies under Asymmetric Information," Working Papers 642, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:642
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    References listed on IDEAS

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    3. By Kishore Gawande & Pravin Krishna & Marcelo Olarreaga, 2012. "Lobbying Competition Over Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 115-132, February.
    4. Gary S. Becker, 1983. "A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(3), pages 371-400.
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