Policies for development aid

My dissertation is an advocacy of the idea that if aid proved to be ineffective, it is partly because of the donor and not only the recipient as it is usually argued. The thesis contributes to the theoretical and empirical literature on aid effectiveness and explores the ability of aid to achieve its goals in the presence of both incentives and informational problems. The thesis consists of three essays dealing with a particular aspect of donor policies that may impact the effectiveness of aid: i) the drivers of aid allocation among recipient countries, ii) ex-post conditionality and the role of reputation in inducing compliance with aid contracts; iii) and finally, the optimal choice of aid modalities. The first chapter investigates the drivers of U.S. aid policy. I find considerable evidence that the pattern of aid is dictated as much by political and strategic considerations, as by the economic needs and merit of the recipients. Most importantly, inertia seems to impact heavily the aid allocation process. Any of these motivations, when excessive, would lead to a time inconsistency situation where the donor is not credible in his conditionality. With such an impact on aid allocation, the question arises on the effectiveness of conditioning aid provision on political, social, or economic reforms. This is precisely the scope of chapter 2. The second chapter investigates the conditions under which reputation can serve as commitment device in order to induce donors of development aid to enforce aid contracts and recipients to comply with such contracts. The idea is that the success of conditionality rests solely on the availability of a commitment technology that ties the hands of the donor. Reputation concerns could create the required incentives and overcome the altruism effect on the donor side. Notwithstanding that incentive creation must not be driven by the volume of aid only, but also by the way it is channelled, i.e. aid modality. This is particularly relevant for recipients with certain characteristics. Depending on the preference alignment of the donor and the recipient, the information structure in place, the optimal aid modality can change. The characteristics of the optimal aid package are investigated in chapter 3. Optimality imposes a mix of fixed project and financial transfer to recipient countries. The transfer can be negative for countries exhibiting a high willingness or ability to redistribute to the poor. This is interpreted as a contribution to the financing of the infrastructure project. The extent of the project (large or small size) is determined by the interest of government for the poor in the recipient country.