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dc.contributor.authorAmegashie, J. Atsuen_US
dc.contributor.authorOuattara, Bazoumanaen_US
dc.contributor.authorStrobl, Ericen_US
dc.description.abstractThe paper presents a theoretical and empirical analysis of a donor’s choice of the composition of unrestricted and in-kind/restricted transfers to a recipient and how this composition is adjusted in response to changes in the moral hazard behavior of the recipient. In-kind or restricted transfers may be used, among others, to control a recipient’s moral hazard behavior but may be associated with deadweight losses. Within the context of foreign aid, we use a canonical political agency model to construct a simple signaling game between a possibly corrupt politician in a recipient country and a donor to illustrate the donor’s optimal choice of tied (restricted) and untied foreign aid. We clarify the condition under which a reduction in the recipient’s moral hazard behavior (i.e., improvement in the level of governance) leads to a fall in the proportion of tied aid. We test the predictions of our theoretical analysis using data on the composition of foreign aid by multilateral and bilateral donors.en_US
dc.publisherCenter for Economic Studies and Ifo Institute (CESifo) Munichen_US
dc.relation.ispartofseriesCESifo working paper 1996en_US
dc.subject.stwInternationale Wirtschaftshilfeen_US
dc.subject.stwMoral Hazarden_US
dc.titleMoral hazard and the composition of transfers: theory with an application to foreign aiden_US
dc.typeWorking Paperen_US
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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