Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25073
Authors: 
Scholl, Almuth
Year of Publication: 
2005
Series/Report no.: 
SFB 649 discussion paper 2005,054
Abstract: 
This paper analyzes optimal foreign aid policy in a neoclassical framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modelled as a limited enforceable contract. We define conditional aid policy 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 the effectiveness of unconditional aid is low while self-enforcing conditional aid strongly stimulates the economy. However, increasing the welfare of the poor comes at high cost: to ensure aid effectiveness, less democratic political regimes receive permanently larger aid funds.
JEL: 
E13
F35
O11
O19
Document Type: 
Working Paper

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