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Please use this identifier to cite or link to this item: http://hdl.handle.net/2108/289

Title: Should aid reward good outcomes? Optimal contracts in a repeated moral hazard model of foreign aid allocation
Authors: Isopi, Alessia
Mattesini, Fabrizio
Keywords: foreign aid
moral hazard
optimal contracts
Issue Date: Jun-2006
Publisher: CEIS
Series/Report no.: Quaderni CEIS; 236
Abstract: We consider in this paper a repeated moral hazard model where a donor, characterized both by altruistic and non altruistic motives, finances a three periods poverty eradication project. In order to model the significant problems that donors face in the actual implementation of aid programs, we assume that the elites of the recipient country, who play an important role in carrying out the project, have an incentive to divert resources from the intended use. We show that optimal aid contracts should be conditional on the previous results of the project. We distinguish however between strong conditionality where contracts are specified on the basis of the performance of the project in all periods and weak conditionality where contracts have, instead, short memory. In this case a recipient that experienced a negative performance will receive less aid in the following period, but will bear no further consequences in the future. If a donor assigns a lot of weight to the welfare of the recipi...
URI: http://hdl.handle.net/2108/289
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