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The Political Economy of Multilateral Aid Funds

Author

Listed:
  • Dreher, Axel
  • Simon, Jenny
  • Valasek, Justin
Abstract
When allocating foreign aid, donor countries face a problem of incentivizing recipient countries to invest in state capacity. Here, we show that donors can incentivize recipient countries by committing to collective decision-making: If aid allocation decisions are made ex post via bargaining between donors, then the negotiated outcome will be skewed towards aggregate efficiency, which induces the recipients to compete over ex ante investments. Our model links the fund's composition of membership and its decision rules to participation, investment and allocation decisions. We also find that majority rule induces stronger competition between recipients, resulting in higher investments in state capacity. The qualitative predictions of our model are broadly consistent with empirical findings on multilateral aid. In particular, the model rationalizes our novel empirical finding that, relative to organizations that use a consensus rule, organizations that use majority are more responsive to changes in recipient-country quality.

Suggested Citation

  • Dreher, Axel & Simon, Jenny & Valasek, Justin, 2018. "The Political Economy of Multilateral Aid Funds," CEPR Discussion Papers 13297, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13297
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    References listed on IDEAS

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    1. Alesina, Alberto & Dollar, David, 2000. "Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
    2. Alberto Alesina & Beatrice Weder, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," American Economic Review, American Economic Association, vol. 92(4), pages 1126-1137, September.
    3. Emmanuelle Auriol & Josepa Miquel-Florensa, 2019. "Taxing fragmented aid to improve aid efficiency," The Review of International Organizations, Springer, vol. 14(3), pages 453-477, September.
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    5. Dreher, Axel & Nunnenkamp, Peter & Thiele, Rainer, 2011. "Are ‘New’ Donors Different? Comparing the Allocation of Bilateral Aid Between nonDAC and DAC Donor Countries," World Development, Elsevier, vol. 39(11), pages 1950-1968.
    6. Vera Z. Eichenauer & Stephen Knack, 2018. "Poverty and Policy Selectivity of World Bank Trust Funds," Journal of International Development, John Wiley & Sons, Ltd., vol. 30(4), pages 707-712, May.
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    8. Reinsberg, Bernhard & Michaelowa, Katharina & Knack, Stephen, 2017. "Which Donors, Which Funds? Bilateral Donors' Choice of Multilateral Funds at the World Bank," International Organization, Cambridge University Press, vol. 71(4), pages 767-802, October.
    9. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
    10. Annen, Kurt & Knack, Stephen, 2018. "On the delegation of aid implementation to multilateral agencies," Journal of Development Economics, Elsevier, vol. 133(C), pages 295-305.
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    15. Svensson, Jakob, 2003. "Why conditional aid does not work and what can be done about it?," Journal of Development Economics, Elsevier, vol. 70(2), pages 381-402, April.
    16. Jenny Simon & Justin Mattias Valasek, 2013. "Centralized Fiscal Spending by Supranational Unions," CESifo Working Paper Series 4321, CESifo.
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    Cited by:

    1. Axel Dreher & Jenny Simon & Justin Valasek, 2021. "Optimal decision rules in multilateral aid funds," The Review of International Organizations, Springer, vol. 16(3), pages 689-719, July.
    2. Liya Palagashvili & Claudia R. Williamson, 2021. "Grading foreign aid agencies: Best practices across traditional and emerging donors," Review of Development Economics, Wiley Blackwell, vol. 25(2), pages 654-676, May.

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    More about this item

    Keywords

    Aid allocation; Aid effectiveness; International organizations; Decision rules;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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