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Incentives, Inequality and the Allocation of Aid When Conditionality Doesn't Work: An Optimal Nonlinear Taxation Approach

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  • Ravi Kanbur
  • Matti Tuomala

    (School of Management, University of Tampere)

Abstract

This paper analyses the impact of aid, and its optimal allocation, when conditionality is ineffective. It is assumed that the recipient government will implement its own preferences no matter what. In this set up, aid can still affect the behavior of a recipient, not through conditionality but through changing resource constraints. We analyze the problem in the tradition of models of optimal non-linear income taxation. We find that unconditional aid increases national income and makes the poor better off in the recipient country, but that there is a crowding out effect as the recipient country reduces labor supply in response to increased aid. On optimal allocation of aid across countries, we find that poorer countries should get more aid, as should countries with governments that are more inequality averse, which conforms to intuition. However, a striking finding is that more unequal countries should get less aid.

Suggested Citation

  • Ravi Kanbur & Matti Tuomala, 2001. "Incentives, Inequality and the Allocation of Aid When Conditionality Doesn't Work: An Optimal Nonlinear Taxation Approach," Working Papers 0104, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:0104
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    File URL: http://urn.fi/urn:isbn:951-44-5213-5
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    References listed on IDEAS

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    1. Finn Tarp, 2006. "Aid and Development," Discussion Papers 06-12, University of Copenhagen. Department of Economics.
    2. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
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    4. Shantayanan Devarajan & David R. Dollar & Torgny Holmgren, 2001. "Aid and Reform in Africa : Lessons from Ten Case Studies," World Bank Publications - Books, The World Bank Group, number 13894.
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    6. Tony Killick, 1995. "Conditionality And The Adjustment Development Connection," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 11, pages 17-36.
    7. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    8. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
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    Cited by:

    1. Gustav Ranis, 2013. "Another Look at Foreign Aid," WIDER Working Paper Series wp-2013-119, World Institute for Development Economic Research (UNU-WIDER).
    2. Viktor P. Ivanitsky & Dmitry N. Gabyshev & Larisa D. Zubkova, 2019. "Individual income tax: New opportunities for management," Upravlenets, Ural State University of Economics, vol. 10(5), pages 41-51, October.
    3. Ranis, Gustav, 2012. "Another Look at Foreign Aid," Center Discussion Papers 133408, Yale University, Economic Growth Center.
    4. Gustav Ranis, 2012. "Another Look at Foreign Aid," Working Papers 1015, Economic Growth Center, Yale University.
    5. Ranis, Gustav, 2013. "Another Look at Foreign Aid," WIDER Working Paper Series 119, World Institute for Development Economic Research (UNU-WIDER).
    6. Ranis, Gustav, 2012. "Another Look at Foreign Aid," Working Papers 106, Yale University, Department of Economics.

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    More about this item

    Keywords

    inequality; unemployment; income decomposition;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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