trade to aid eu s temporary tariff waivers for flood hit pakistan in this paper we study the effectiveness of the first large scale unilateral trade concessions as foreign aid for disaster relief i e eu tariff waivers on goods heavily exported by pakistan which was severely hit by the 2010 floods using a triple difference approach and a synthetic control approach we find that the tariff waivers substantially increased pakistan s exports to the eu the export hike occurred within a few months after the waivers became effective and did not significantly depress exports by competing countries while the export boost brought greater employment opportunities in the tariff waived industries we find little evidence that the greater labor demands from trade were particularly beneficial to the areas most affected by the floods our findings suggest that trade policy may complement traditional means of foreign aid but trade concessions alone may be inadequate as the areas most affected by natural disasters may be poorly targeted

optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

the new role for the world bank the world bank was founded to address what we would today call imperfections in international capital markets its founders thought that countries would borrow from the bank temporarily until they grew enough to borrow commercially nac 1946 p 312 black 1952 some critiques and analyses of the bank are based on the assumption that this continues to be its role for example some argue that the growth of private capital flows to the developing world has rendered the bank irrelevant however we will argue that modern analyses should proceed from the premise that the world bank s central goal is and should be to reduce extreme poverty and that addressing failures in global capital markets is now of subsidiary importance the bank s stated goal is reducing poverty the overwhelming majority of bank subsidies from its shareholder countries go to the international development association ida its arm for making grants and highly concessional loans to the lowest income countries the bank s greatest impact comes from its role in the dramatic policy changes many developing countries have undertaken in multiple sectors that most economists would consider likely to reduce poverty either by increasing growth or promoting equity why might donor countries choose to work through an international organization to advance the goal of reducing poverty effective aid often involves

when is foreign aid policy credible aid dependence and conditionality the author studies foreign aid policy within a principal agent framework he shows that one reason for foreign aid s poor overall record may be a moral hazard problem that shapes the aid recipient s incentive to undertake structural reform the model s basic prediction is a two way relationship disbursements of foreign aid are guided in part by the needs of the poor anticipating this recipients have little incentive to improve the welfare of the poor preliminary econometric work shows that the data support this hypothesis in principle conditionality could partly solve this problem but only if the donor can make a binding commitment to increase disbursements in good relative to bad states without such a commitment technology aid disbursements remain guided by the needs of the poor and recipient countries maintain a low effort to reduce poverty contrary to the conventional wisdom found in the aid literature the author shows that the welfare of all parties might be improved by using tied project aid or by delegating part of the aid budget to an international agency with less aversion to poverty

lobbying by ethnic groups and aid allocation we develop a political economic model of foreign aid allocation each ethnic group in the donor country lobbies the government to allocate more aid to its country of origin and the government accepts political contributions from lobby groups initial per capita income of the recipients and those of the ethnic groups are shown to be important determinants of the solution of the political equilibrium we also examine the effects of changes in the degree of corruption aid fatigue and ethnic composition in the donor country on the allocation of aid

does conditionality work a test for an innovative us aid scheme performance based aid has been proposed as an alternative to the failed traditional approach whereby donors make aid conditional on the reform promises of recipient countries however hardly any empirical evidence exists on whether ex post rewards are effective in inducing reforms we attempt to fill this gap by investigating whether the millennium challenge corporation mcc was successful in promoting better control of corruption we employ a difference in difference in differences ddd approach considering different ways of defining the treatment group as well as different time periods during which incentive effects could have materialized we find evidence of strong anticipation effects immediately after the announcement of the mcc while increasing uncertainty about the timing and amount of mcc aid appears to have weakened the incentive to fight corruption over time

human rights treaty ratification of aid receiving countries this paper studies the decision to ratify human rights treaties hrt at the united nations we present new empirical evidence that sheds light on who raties when and why controlling for the quality of domestic human rights institutions high levels of predetermined hrt participation relative to other aid recipients has a signicant positive eect on a country s foreign aid receipts suggesting that aid donors use treaty participation as a criterion to allocate foreign aid surprisingly though we nd that high levels of hrt participation precipitates a decline in the quality of domestic human rights institutions taken together with the result that donors reward treaty participation with foreign aid this suggests that using foreign aid as an incentive for treaty participation has indirect negative consequences for real human rights inconsistent with the traditional view that aid donors have a positive preference for human rights practices in developing countries we show however that the treaty participation of other aid recipients has a strong and positive eect on domestic human rights institutions that more than osets the negative eects

does aid availability affect effectiveness in reducing poverty a review article this paper addresses the impact of aid supply on aid effectiveness first we review theoretical literature that deals with the problem of governance in donor recipient relationships and are susceptible of highlighting effects of aggregate aid availability second we provide a conceptual framework that explicitly incorporates a trade off between considerations of needs and governance we examine the impact of aid supply on the manner in which a donor agency allocates the available money between countries differing in terms of both needs and domestic governance the central conclusion is that a donor s utility function that embodies the need governance trade off and the associated optimization mechanism yield a meaningful rule to guide inter country allocation of aid resources

guns and butter and government popularity in britain britain under the government of prime minister thatcher provides a unique opportunity to probe the effects of both war and macroeconomic performance on government popularity monthly ratings for thatcher and conservative party support june 1979 to july 1985 are examined by way of box tiao intervention models the model that best captures the impact of the falklands war of 1982 is of the gradual temporary variety popularity gains accrued through the three month war shrink in a geometric fashion nevertheless they prove to be worth over five percentage points for the conservative party a year later in the 1983 election macroeconomic performance meanwhile is found to have an asymmetric effect on government popularity with unemployment strongly significant but inflation not significant at all apparently the british public is punishing failure on employment while letting success on inflation go unrewarded qualifications of the positive effect of war and the negative effect of macroeconomic performance are suggested

choosing to target what types of countries get different types of world bank projects well governed countries are more likely to make use of foreign aid for the purposes of economic development and poverty alleviation therefore if aid agencies are providing funds for the sake of development these countries should receive more aid and categorically different types of aid as compared with poorly governed countries in poorly governed countries aid should be given in forms that allow for less discretion using an original data set of all world bank projects from 1996 to 2002 the author distinguishes programmatic projects from investment projects and national from subnational investment projects if the world bank allows more discretion in well governed countries then it will choose to provide programmatic and national aid for these recipients the author presents evidence that the world bank provides a larger proportion of national investment lending in better governed countries with regard to programmatic lending he finds mixed evidence among counties eligible for international development association ida aid good governance surprisingly is associated with a lower proportion of programmatic aid whereas for international bank for reconstruction and development ibrd borrowers good governance is associated with a higher proportion the author subjects these results to a number of robustness checks although he confirms the existing result in the literature that the world bank provides larger overall amounts of aid to better governed countries his examination of the disaggregated data leads to questioning whether both lending wings of the world bank are designing aid programs in the most prodevelopment way possible

can process conditionality enhance aid effectiveness the role of bureaucratic interest and public pressure can process conditionality enhance poverty reduction in developing countries we address this question in a political economic framework with political distortions on the recipient and the donor side process conditionality is a useful tool only if the international financial institutions hold all necessary information to assess the political situation in recipient countries and to select the true representatives of the poor into a participatory process if they do not hold this information or if bureaucratic interests reduce their incentive to acquire this information process conditionality loses its effectiveness

the governance of non governmental organizations in uganda summary using original survey data we document the activities resources and governance structure of ngos operating in uganda the ngo sector is funded primarily by international non governmental organizations and bilateral donors we find large differences in size and funding across ngos with only a few ngos attracting most of the funding most ngos are small and underfunded and focus on raising awareness and advocacy few ngos are faith based most screening and monitoring is done by grant agencies some monitoring is also done internally by members and trustees little monitoring is done by government ngos do not file income tax returns and few respondents are able to provide coherent financial accounts

are bilateral and multilateral aid for trade complementary using the first comprehensive estimates of ad valorem tariff equivalent bilateral trade costs spanning the time period 2002 10 we examine whether the aid for trade aft inflows reduce bilateral trade costs facing aid recipients if so we ask whether the trade costs reduction effects of aft from bilateral and multilateral sources are complementary by showing the extent to which the observed trade cost reduction effects of aft from bilateral multilateral sources correlate with the magnitudes of aft disbursements from multilateral bilateral sources we present plausible explanation for the cross country variations in the extent to which aft promotes trade flows our findings have thus important policy implications for shaping future discourses on the coordination of disbursements for enhancing the effectiveness of aft

samaritan agents on the strategic delegation of aid policy abstract should a donor delegate the responsibility for allocating its aid budget to a less inequality averse agent to alleviate the consequences of the samaritan s dilemma it is facing i show that when aid impact differs across recipients the optimal type of agent depends on whether or not committing to a greater share for countries where the productivity of aid is low raises the combined domestic incomes of recipients this is the case for donors too concerned with efficiency ex post they therefore delegate the decision on the discretionary aid allocation rule to agents more sensitive to distributional issues than themselves

international coordination and the effectiveness of aid this paper discusses and seeks to quantify the effects of improved donor coordination on aid effectiveness empirical estimates are first provided of the reductions in transaction costs that can be achieved by better donor coordination via concentration to fewer partner countries and a shift from project aid to programme based approaches further estimates are presented showing how much could be gained in terms of poverty reduction by optimizing aid allocation across countries the potential gains of a coordinated reallocation would be huge but there are severe political implementation constraints still the overall conclusion of the paper is that there are huge potential gains from donor coordination

volunteerism after the tsunami the effects of democratization using three waves of survey data from fishing villages in aceh indonesia for 2005 09 the paper examines the determinants of local volunteer labor after the tsunami volunteer labor is the village public sector labor force for maintenance clean up and renovation of public capital while also examining the effects on volunteerism of village destruction and trauma pre existing social capital diversity and aid delivery the papers focuses on the effects of democratization the tsunami and massive international aid effort prompted the settlement of the insurgency movement in aceh which had led to suspension of local elections over the prior twenty or more years until 2006 village heads who call volunteer days were effectively selected by village elites who may highly value the public facilities maintained by volunteer labor with elections volunteer days fall under the new regime with democratically elected village heads calling fewer volunteer days which may appeal more to the typical villager identification comes from pseudo randomized differential timing of elections

natural resources aid and democratization a best case scenario natural resources and aid give dictators revenue to maintain power attempts are being made therefore to funnel these resources away from nondemocratic governments and toward their citizens using formal analysis and building on existing theories of democratization i analyze the effects of such institutional solutions when they function perfectly the best case scenario the models show that even with institutional safeguards these resources diminish chances for democratization in addition to their practical importance the results have an important theoretical implication the political resource curse may not be due to dictators use of these resources but simply to their existence in nondemocracies

modeling government popularity in postwar britain a methodological example economic theory suggests that government popularity may be related to the rate of change of nonstationary economic quantities and the level of stationary financial variables like inflation or interest rates political theory suggests that this relationship may not be stable over time we find that there is a well defined relationship between u k government popularity in the postwar period and a small set of economic variables i e unemployment inflation and real interest rates unusual political events are also important voters appear to discount history at a high rate remarkably the estimated equation is very stable and passes a battery of stability tests including postsample parameter stability tests furthermore estimation using the kalman filter shows no tendency for the parameters to vary systematically over time implying that voter preferences have remained broadly constant throughout the postwar years

a panel data analysis of the fungibility of foreign aid the donor community has been increasingly concerned that development assistance intended for crucial social and economic sectors might be used directly or indirectly to fund unproductive military and other expenditures the link between foreign aid and public spending is not straightforward because some aid may be fungible this article empirically examines the impact of foreign aid on the recipient s public expenditures using cross country samples of annual observations for 1971 90 for the base sample of 14 developing countries it finds that aid is not fungible at the aggregate level and there is no associated tax relief increasing the number of countries however makes aid fungible moreover results based on the main sample indicate that aid is fungible in three out of five sectors examined developing country governments receiving earmarked concessionary loans for agriculture education and energy reduce their own resources going to these sectors and use them elsewhere only loans to the transport and communication sector are fully spent on the purposes intended by donors because most aid appears to be fungible the rate of return on a specific donor funded project tells little about the impact of that assistance a better approach may be to tie foreign aid to an overall public expenditure program that provides adequate resources to crucial sectors

corrupt governments do not receive more state to state aid governance and the delivery of foreign aid through non state actors abstract a core result of the aid allocation literature is that the quality of governance in recipient countries does not affect the amounts of foreign aid received donor countries may still give aid to poorly governed countries because of a dilemma they face those countries most in need typically also lack proper institutions this paper argues that donors try to resolve this dilemma by delivering aid through non state actors using aid shares as well as absolute amounts of aid allocated through state and non state channels and considering different dimensions of governance we provide evidence that bypassing governments via ngos and multilateral organizations is indeed a response to weak recipient state institutions the effect is stronger in aid sectors where donors can more easily switch between channels and weaker for higher levels of economic self interest among donors

expectations and preferences in british general elections t a te address two questions how do people form their expectations about the likely winner of the next general election and what are the links between expectations and votes using v v data collected by the gallup organization in great britain we find that the expectations formation process 1 has a significant inertia component but also a rapid adjustment to current information 2 reflects voters ability to translate economic expectations into political forecasts and 3 is time bounded possessing special characteristics immediately before and after a general election the analysis also confirms the existence of a small bandwagon effect whereby expectations that one party will win inflate that party s vote the ability of voters to make reasonable forecasts without being unduly influenced by their own preferences suggests that under normal circumstances voters are expressing real preferences and not simply following the crowd

the hard challenge of aid coordination aid coordination is a constant theme of discussion among national and international aid agencies in their search for more effectiveness and efficiency in delivering development assistance this paper seeks to clarify some of the arguments currently made in support of aid coordination and to precise unavoidable trade offs born of the existence of political costs it is anchored in the available literature on aid delivery while focusing on the implementation problems of aid coordination among donor countries in particular it deals with a the issue of consistently and collectively handling possible governance failures in recipient countries and b the impact of heterogeneity of donor countries on the effectiveness of aid coordination

the vp function a survey of the literature on vote and popularity functions after 25 years vp functions explain the support for the government at votes and polls by economic and political variables most studies analyze macro time series we also cover studies of individual voters socio economic groups and regional cross sections the theory starts from the responsibil ity hypothesis voters hold the government responsible for economic conditions it works in two party block systems but not else voters in most countries are found to be sociotropic egotropic voting also occurs voters myopia is well established voting is retrospective as expectations are static it costs the average government almost 2 of the vote to rule

to give or to forgive aid versus debt relief is generalized debt relief an effective development strategy or should assistance be tailored to countries characteristics to answer this question the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief since offering such a menu is costly it is preferred by donors only when the cost of assistance is low and the probability that an indebted country is creditworthy is high enough for lower probabilities and higher costs of assistance donors prefer a policy of only debt relief very limited aid is the preferred policy only for high costs of assistance and low probabilities that the government is creditworthy

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

aid and growth regressions this paper examines the relationship between foreign aid and growth in real gdp per capita as it emerges from simple augmentations of popular cross country growth specifications it is shown that aid in all likelihood increases the growth rate and this result is not conditional on good policy there are however decreasing returns to aid and the estimated effectiveness of aid is highly sensitive to the choice of estimator and the set of control variables when investment and human capital are controlled for no positive effect of aid is found yet aid continues to impact on growth via investment we conclude by stressing the need for more theoretical work before this kind of cross country regressions are used for policy purposes

is local beautiful fiscal decentralization in mexico summary in this study we present evidence from mexico regarding the weak effectiveness of federal transfers and low absorption capacity of sub national governments in poor areas when political opportunistic behavior is present we show that the distribution of conditional transfers is discretionary due to a monitoring problem and deficiency in institutional frameworks this may be the cause for opportunistic behavior by political elites the results suggest that more funds are distributed to areas with more voters in addition localities with a higher number of swing voters also receive more resources these results show that the poorest populations receive the least amount of money from the community based development funds

gaining on the swings the changing geography of the flow of the vote and government fortunes in british general elections 1979 1992 pattie c j johnston r j and fieldhouse e 1993 gaining on the swings the changing geography of the flow of the vote and government fortunes in british general elections 1979 1992 reg studies 28 141 154 the results of british elections during the 1980s produced a politically polarized country with the labour party increasingly thrown back on support in the urban industrial areas of the north and the conservatives making gains throughout much of the south the first general election of the 1990s is investigated to see whether this trend has continued into the new decade analysis of the constituency flow of the vote suggests that britain is less polarized in the 1990s than in the 1980s but that the electoral geography of the country still favours the conservatives pattie c j johnston r j et fieldhouse e 1994 un revirement d opinion l evolution des tendances electorales et le sort du gouvernement au moment des elections legislatives en grande bretagne de 1979 a 1992 reg studies 28

motivations to remit evidence from botswana in this article a theory of motivations to send remittances is described and tested with data from botswana altruism is one of the motivations tested and found to be an insufficient explanation for remittances among migrants in botswana a refinement of the model stipulates a modified altruism or enlightened self interest in this model the relationship between the migrant and family is tempered by an implicit understanding of mutual benefit the household strategy may be to encourage some members to migrate as a means of spreading risk and sharing gains the household strategy is similar to an insurance policy where migration is to places where market potential is high the risks incurred might be high the example is given of migration during a drought in botswana migrant remittances were greater in households with more cattle or households with more to lose drought alone was not statistically related to remittances increases in remittances were related to increased levels of education it is suggested that repayment was the motive for parents investment in migrants education migrants gains are identified as the potential for an inheritance the security of channeling investments through a trusted family member and security in having a home to return to it is pointed out that the altruism and family remittances from urban migration were strategies that bridged the simple dynamic of either urban development or rural development impacting on family welfare it is suggested that household models of economy adopt some measure to express the relationship of household wealth to remittances from urban migrants

counterpart funding requirements and the foreign aid procyclicality puzzle official development assistance is a key source of external finance in many developing countries a striking feature of these aid flows is their positive correlation with business cycles in recipient countries this pattern is puzzling in that it reinforces recipients already strong and costly macroeconomic fluctuations we propose a simple model of investment financing and aid provision under asymmetric information that rationalizes such a pattern we assume that donor agencies and recipient governments value projects differently and that donors know less than recipients do about project characteristics we show that donors can make a recipient government identify high return projects by requiring that the latter contribute some of its own funds to projects providing these matching grants or counterpart funds is less affordable for recipients during economic downturns which leads to aid procyclicality our model produces aid contracts consistent with those used by aid agencies rationalizes observed aid patterns and yields a rich set of testable empirical predictions

fragile states and development policy it is widely recognized that fragile states are key symptoms of under development in many parts of the world such states are incapable of delivering basic services to their citizens and political violence is commonplace as of yet mainstream development economics has not dealt in any systematic way with such concerns and the implications for development assistance this paper puts forward a framework for analyzing fragile states and applies it to a variety development policies in different types of states

why conditional aid does not work and what can be done about it abstract this paper studies a simple reform that introduces ex post incentives for the donor to reward good policies contrary to existing practices instead of committing aid to each recipient ex ante and making aid conditional on reform the donor centralizes the disbursement decision by committing aid to a group of countries the actual amount disbursed to each individual country would depend on its relative performance this explicit linkage of the allocation and disbursement decisions has two important advantages as compared to present practices first it raises the opportunity cost of disbursing aid ex post thereby giving the donor stronger incentives to reward good policies second competition among recipients allows the donor to make inferences about common shocks which otherwise conceal the recipient s choice of action this enables the donor to give aid more efficiently

can the west save africa in the new millennium the western aid effort toward africa has surged due to writ ings by well known economists a celebrity mass advocacy campaign and decisions by western leaders to make africa a major foreign policy priority this survey contrasts the predominant transformational approach west comprehensively saves africa to occasional swings to a marginal approach west takes one small step at a time to help individual africans evaluation of one step at a time initiatives is generally easier than that of transformational ones either through controlled experiments although these have been oversold or simple case studies where it is easier to attribute outcomes to actions we see two themes emerge from the literature survey 1 escalation as each successive western transformational effort has yielded disappointing results as judged at least by stylized facts since again the econometrics are shaky the response has been to try an even more ambitious effort and 2 the cycle of ideas rather than a progressive testing and discarding of failed ideas we see a cycle in aid ideas in many areas in africa with ideas going out of fashion only to come back again later after some lapse long enough to forget the previous disappointing experience both escalation and cyclicality of ideas are symptomatic of the lack of learning that seems to be characteristic of the transfor mational approach in contrast the marginal approach has had some successes in improving the well being of individual africans such as the dramatic fall in mortality

budget support versus project aid a theoretical appraisal should donors interested in the effectiveness of developmental programmes rely on conditional budget support or on project aid to answer this question we present a model in which only a subset of developmental expenditures can be subject to conditionality we show that budget support is preferable to project aid when the preferences of donors and recipients are aligned and when assistance is small relative to the recipients own resources furthermore when donors cannot observe the recipient s type they may impose higher levels of conditionality to separate committed governments from uncommitted ones

modelling the recovery outcomes for defaulted loans a survival analysis approach this study investigates the determinants affecting the recovery outcome for bank loans when firms default we develop survival analysis models explaining the transition hazards of bank loan recoveries varying over time within the conditional probability of firms either fully recovering or not both loan and recovery covariates are critical for recovery outcomes furthermore we identify a hump shaped hazard function peaking at 23 months from default date followed by a drop the log logistic parametric model describes the best fit our results demonstrate the significant covariates affecting loan recovery rates highlighting the importance for banks to structure their loans in the best possible way

does foreign aid distort incentives and hurt growth theory and evidence from 75 aid recipient countries foreign aid transfers can distort individual incentives and hence hurt growth by encouraging rent seeking as opposed to productive activities we construct a model of a growing small open economy that distinguishes two effects from foreign transfers i a direct positive effect as higher transfers allow the financing of infrastructure ii an indirect negative effect as higher transfers induce rent seeking competition by self interested individuals in this framework the growth impact of aid is examined jointly with the determination of rent seeking behavior we test the main predictions of the model for a cross section of 75 aid recipient countries there is evidence that aid has a direct positive effect on growth which is however significantly mitigated by the adverse indirect effects of associated rent seeking activities this is especially the case in recipient countries with relatively large public sectors

optimal management of transfers an odd paradox abstract this paper considers the case of transfers when there exists a serious preference misalignment between the transfer maker and the beneficiary the former wants to reduce the resulting outcome discrepancy through monitoring the use of the transfer and imposing sanctions if the discrepancy proves too large this external discipline combines with the internal discipline of the beneficiary that is his her willingness and ability to align with the transfer maker s objective besides the fact that costs of monitoring and sanctioning are explicitly taken into account an original feature of our model specification is that the two types of discipline are made comparable they can be summed up to obtain an aggregate discipline we show that paradoxically an exogenous improvement of internal discipline may be over compensated by a fall of external discipline total discipline thus decreases and the discrepancy between the actual and the intended uses of the transfer increases instead of decreasing another consequence is that the relationship between internal and total disciplines may be non monotonic these results generalize to alternative specifications of the basic model

debt relief for poor countries conditionality and effectiveness this paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries we develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract in contrast to the recent practice of fully cancelling debt optimal incentive compatible conditionality is accompanied by a concessionality level that implies a combination of subsidized loans and outright grants the optimal concessionality level depends on the recipient s access to international financial markets and on the strength of the conflict of interest incentive compatible transfers with optimal concessionality levels generate substantial welfare gains if the donor does not implement the optimal concessionality level and provides subsidized loans only then the effectiveness of transfers decreases in the long run with severe welfare implications in contrast transfers are less effective in the short run if the donor offers outright grants only

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

the politics of structural change swedish social democracy and thatcherism in comparative perspective the 1930s and the 1980s were decades of significant political economic change in the capitalist democracies depression and the rise of the industrial working class created opportunities for the establishment of social democracy in the 1930s stagflation and the decline of the working class made possible waves of radical rightist reform however this article suggests that only governments that do not have to concentrate myopically on the exigencies of winning the next election have the political space to undertake structural changes the benefits of which may only be manifest in the medium term in turn successful reforms are likely to entail changes in underlying social structural conditions such as the strengthening or weakening of organized labor movements that both expand the electoral constituencies of the government s partisanpreferred policies and improve their macroeconomic efficacy these propositions are examined with respect to the construction social democracy in sweden in the 1930s and the

understanding and predicting bank rating transitions using optimal survival analysis models abstract in the aftermath of the financial crisis this study investigates which underlying determinants cause bank rating transitions we develop survival analysis models to explain credit transition hazards using macroeconomic factors and the rating history we find that there exists a significant dependence of rating upgrade or rating downgrade transition hazards on rating specific covariates and macro economic covariates our results confirm the momentum effect meaning that a financial institution that has been recently upgraded downgraded has a higher chance of being upgraded downgraded again the predictive performance of the developed models turns out to be satisfactory

stability and centrality of legislative choice in the spatial context majority rule spatial voting games lacking a core still always present a near core outcome more commonly known as the copeland winner this is the alternative that defeats or ties the greatest number of alternatives in the space previous research has not tested the copeland winner as a solution concept for spatial voting games without a core lacking a way to calculate where the copeland winner was with an infinite number of alternatives we provide a straightforward algorithm to find the copeland winner and show that it corresponds well to experimental outcomes in an important set of experimental legislative voting games we also provide an intuitive motivation for why legislative outcomes in the spatial context may be expected to lie close to the copeland winner finally we show a connection between the copeland winner and the shapley value and provide a simple but powerful algorithm to calculate the copeland scores of all points in the space in terms of the modified power values of each of the voters and their locations in the space

trade preferences to small developing countries and the welfare costs of lost multilateral liberalization the proliferation of preferential trade liberalization over the past 20 years has raised the question of whether it slows down multilateral trade liberalization recent theoretical and empirical evidence indicates this is the case even for unilateral preferences that industrial countries provide to small and poor countries but there is no estimate of the resulting welfare costs to avoid this stumbling block effect the authors suggest replacing unilateral preferences by a fixed import subsidy they argue that this scheme would reduce the drag of preferences on multilateral liberalization and generate a pareto improvement more important the authors provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization by combining recent estimates of the stumbling block effect of preferences with data for 170 countries and over 5 000 products they calculate the welfare effects of the united states european union and japan switching from unilateral preferences to the developing countries to the import subsidy scheme even in a model with no dynamic gains to trade the authors find that the switch produces an annual net welfare gain for the 170 countries 4 354 million and for each group the united states european union and japan 2 934 million the developing countries 520 million and the rest of the world 900 million

company interests and foreign aid policy playing donors off against one another abstract the evidence on conditionality indicates that this instrument sometimes works and sometimes does not work we suggest that third parties to the donor recipient relationship influence the aid disbursement the halt in aid that should follow non compliance could trigger the recipient to cancel contracts with companies from donor countries which creates incentives for the companies to put pressure towards aid disbursement we use a multi agent triadic model of the relationships between a recipient and two donors and two companies to illustrate that recipients may act strategically to make third parties like companies and others influence the disbursement decision failing to take account of third parties role yields the opposite result conditionality becomes successful

suicide bombing as inter generational investment a simple model of terrorism is presented where the current generation is linked to the next one by some altruism as in standard dynastic family models bombing today some target increases the probability of the benefit of some public good accruing to the next generation the model is used to discuss the fact that suicide bombers of the hezbollah in particular have been found by krueger and maleckova 2002 to come disproportionately from wealthy families and have an above average education level while the latter could be expected to increase the opportunity cost of investing in such a suicide it is suggested that it probably increases also the sensitivity to the future generation s welfare the latter effect might offset the deterrent effect of the former

small is beautiful motivational allocation in the non profit sector we build an occupational choice general equilibrium model with for profit firms non profit organizations and endogenous private warm glow donations lack of monitoring on the use of funds implies that an increase of funds of the non profit sector because of a higher incomein the for profit sector a stronger preference for giving or an inflow of foreign aid worsens the motivational composition and performance of the non profit sector we also analyze the conditions under which donors through linking donations to the motivational composition of the non profit sector non profits themselves through peer monitoring or the government using a tax financed public funding of non profits can eliminate the low effectiveness equilibrium we present supporting case study evidence from humanitarian emergencies and developing country ngo sector and humanitarian emergencies

is foreign aid fungible evidence from the education and health sectors this paper adopts a new approach to the issue of foreign aid fungibility in contrast to most existing empirical studies panel data are employed that contain information on the specific purposes for which aid is given this allows linking aid that is provided for education and health purposes to recipient public spending in these sectors in addition aid flows that are recorded on a recipient s budget are distinguished from those that are not recorded on budget and the previous failure to differentiate between on and off budget aid is shown to produce biased estimates of fungibility sector program aid is the measure of on budget aid whereas technical cooperation serves as a proxy for off budget aid the appropriate treatment of off budget aid leads to lower fungibility estimates than those reported in many previous studies specifically in both sectors and across a range of specifications technical cooperation which is the largest component of total education and health aid leads to at most a small displacement of recipient public expenditures

the roles of foreign aid and education in the war on terror this paper presents a theoretical framework and some empirical results showing that the level of foreign aid received reduces the supply of terrorist attacks by recipient countries as does the recipient country s level of education due account is taken of endogeneity problems in producing these results they suggest that western democracies which are the main targets of terrorist attacks should invest more funds in foreign aid with a special emphasis on supporting education

aid fragmentation and effectiveness what do we really know summary aid fragmentation is widely recognized as being detrimental to development outcomes we reinvestigate the impact of fragmentation in the context of growth bureaucratic policy and education focusing on a number of conceptually different indicators of fragmentation and paying attention to potentially heterogeneous effects across countries sectors and channels of influence our systematic and detailed reexamination of existing empirical studies shows that this differentiation is crucial in some sectors such as primary education donor concentration or limiting donor numbers appear to be detrimental rather than beneficial for development outcomes in other areas we find the expected negative effect but only when we conceptualize fragmentation as a lack of lead donors too limited concentration rather than in terms of donor numbers in all cases sufficient initial administrative capacity in recipient countries prevents the negative and reinforces the positive effects of fragmentation this stresses the importance of questioning the sweeping conclusions drawn by much of the previous literature based on what we currently know generalizing judgments about the effect of aid fragmentation may be misleading

is there cyclical bias in bank holding company risk ratings abstract this paper examines whether bank holding company bhc risk ratings are asymmetrically assigned or biased over business cycles from 1986 to 2003 in a model of ratings determination which accounts for bank characteristics financial market conditions past supervisory information and aggregate macro economic factors we find that bank exam ratings exhibit inter temporal characteristics first exam ratings exhibit some evidence of examiner bias for several periods analyzed when the business cycle turns examiners sometime depart from standards that they set during the previous phases of the cycle however this bias is not widespread or systematic second exam ratings exhibit some inertia our results suggest that examiners rate on the side of not changing rather than upgrading or downgrading an institution s exam rating third we find robust evidence of a secular trend towards more stringent examination bhc ratings standards over time

does the samaritan s dilemma matter evidence from u s agriculture the samaritan s dilemma posits a downside to charity recipients may rely on free aid instead of their own efforts anecdotally the expectation of free assistance is thought to be important for decisions about insurance and risky behavior in numerous settings but reliable empirical evidence is scarce we estimate whether the samaritan s dilemma exists in u s agriculture where both private crop insurance and frequent federal disaster assistance are present we find that bailout expectations are qualitatively and quantitatively important for the insurance decision furthermore aid expectations reduce both expenditure on farm inputs and subsequent crop revenue jel d72 h84 q18

organization of disaster aid delivery spending your donations abstractthis article examines how different organizational structures in disaster aid delivery affect house aid quality we analyze three waves of survey data on fishermen and fishing villages in aceh indonesia following the 2004 tsunami we categorize four organizational structures based on whether and to whom donors contract aid implementation compared to bilateral contracting between donors and implementers donors that vertically integrate and do their own implementation offer the highest quality housing as rated by village heads and have fewer counts of faults such as leaky roofs and cracked walls as reported by fishermen however they shade in quality as they lose dominance as the leading aid agency in a village domestic implementers and the government agency that was responsible for significant portions of aid delivery provide significantly lower quality aid we also examine how the imposition of shared ownership the primary social agenda for boat aid agencies affects boat aid quality we

on the delegation of aid implementation to multilateral agencies some multilateral agencies implement aid projects in a broad range of sectors with aid disbursements showing a strong overlap with those of bilateral donors the question then arises of why do bilateral donors delegate sizable shares of their aid to non specialized agencies for implementation this paper develops a game theoretic model to explain this puzzle donors delegate aid implementation to the multilateral agency ml to strengthen the policy selectivity of aid incentivizing policy improvements in recipient countries in turn improving aid s development effectiveness bilateral donors are better off delegating aid to ml even when they are purely altruistic but disagree on how aid should be distributed across recipients key for our result to hold is that ml searches some middle ground among disagreeing donors aid selectivity in terms of both policy and poverty emerges endogenously and is credible as it is the solution to ml s optimization problem moreover the model shows that if one sufficiently large donor is policy selective in its aid allocations there is no need for other donors to be policy selective the world bank s aid program for lower income countries the international development association ida is shown to fit the assumptions and predictions of the model specifically ida is a dominant donor in most of its recipient countries and is much more policy and poverty selective than bilateral aid donors view it as a public good and contribution more to it when bilateral aid is less selective potential threats to ida s role as a dominant policy selective donor include the emergence of nontraditional donors changes in voting shares and traditional donors increasing use of earmarked contributions

political conditionality and foreign aid this article argues that a new generation of political conditionalities has emerged during the last decade this requires an expansion of the original definition and research agenda beyond the traditional questions of use and effectiveness however there is also a need to dig deeper into the dynamics surrounding political conditionalities particularly the bargaining processes and outcomes along the aid chain from domestic donor politics donor harmonization fora policy dialog spaces to the political economy of recipient institutional reform and donor coping strategies because they influence the set up use follow up purpose and effectiveness of pcs

the theory of moral hazard and unobservable behaviour part i principal agent models are studied in which outcomes conditional on the agent s action are uncertain and the agent s behaviour therefore unobservable for a model with bounded agent s utility conditions are given under which the first best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes for general models it is shown that the solution may not always be obtained by using the agent s first order conditions as constraint general conditions of lagrangean type are given for problems in which contracts are finite dimensional 1 the moral hazard situation

aid investment and incentives promoting productive investment and economic growth are among the key objectives of most aid organizations operating in poor countries however it is not possible to conclude from existing empirical evidence that aid contributes positively to growth in this paper it is shown that those rather negative results may be explained by important incentive problems built into the aid system itself the recipient countries own efforts to contribute to investment and growth may in reality be undermined and the result may be aid dependency

aid dutch disease and manufacturing growth abstract we examine the effects of aid on the growth of manufacturing using a methodology that exploits the variation within countries and across manufacturing sectors and corrects for possible reverse causality we find that aid inflows have systematic adverse effects on a country s competitiveness as reflected in the lower relative growth rate of exportable industries we provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows we conjecture that this may explain in part why it is hard to find robust evidence that foreign aid helps countries grow

what explains the success or failure of structural adjustment programs in the 1980s development assistance shifted largely from financing investments such as roads and dams to promoting policy reform this change came because of a growing awareness that developing countries were held back more by poor policies than by a lack of finance for investment after nearly 20 years experience with policy based or conditional lending there have now been many studies of adjustment lending most of which take a case study approach many conclude that policy based lending works if countries have decided on their own to reform the authors examine a database of 220 world bank supported reform programs to identify why adjustment programs succeed or fail they find that a few political economy variables can successfully predict the outcome of an adjustment loan 75 percent of the time variables under the world bank s control resources devoted to preparation and supervision or number of conditions have no relationship with an adjustment program s success or failure what development agencies must do then is select promising candidates for adjustment support when the candidates is a poor selection devoting more administrative resources or imposing more conditions will not increase the likelihood of successful reform to improve its success rate with adjustment lending the world bank must become more selective and do a better job of understanding which environments are promising for reform and which are not that is likely to lead to fewer adjustment loans unless there is a significant change in the number of promising reformers to become more effective at supporting policy reform the agency must be willing to accept that this may lead to smaller volumes of lending

gradualism in aid and reforms abstract dynamic strategic interaction between an international donor and a recipient government is analyzed to review the efficacy of aid conditionality for governance reforms in ldcs it is shown that irrespective of whether the donor can fully commit to the aid program or not for maximal improvement in governance the aid should be disbursed in increments with each subsequent tranche being conditional on prior reforms demonstrating aid gradualism while the attraction of future aid incentivizes authorities to push through reforms these reforms in turn also make aid diversion less feasible further under full commitment the optimal aid package may involve offering scope for interim aid diversion to the elite for long term improvement in governance with such aid diversion being more likely to happen when the total aid budget is large with only partial commitment so that time consistency requires the donor to reconfigure aid in each round it is shown that a interim aid diversion is no longer viable and b both aid and reforms exhibit strong gradualism or what is known as the starting small and grow later principle in commitment models

politics and the effectiveness of foreign aid abstract critics of foreign aid programs have long argued that poverty reflects government failure in this paper i test predictions for aid effectiveness based on an analytical framework that relates aid effectiveness to political regimes i find that aid does not significantly increase investment nor benefit the poor as measured by improvements in human development indicators but it does increase the size of government the impact of aid does not vary according to whether recipient governments are liberal democratic or highly repressive but liberal political regimes and democracies ceteris paribus have on average 30 lower infant mortality than the least free regimes this may be due to greater empowerment of the poor under liberal regimes even though the political elite continues to receive the benefits of aid programs an implication is that short term aid targeted to support new liberal regimes may be a more successful means of reducing poverty than current programs

clientelism and aid abstract using a model of probabilistic voting we analyze the impact of aid on the political equilibrium in the recipient country or region we consider politicians with mixed motives they are interested in promoting social welfare but also value the benefit of holding office we label as clientelistic the politician who most values the benefit of being in power we find that the impact of aid on the political equilibrium and therefore on the quality of policy in the recipient country using utilitarian social welfare as a benchmark ultimately depends on the value of the elasticity of the marginal utility of consumption when elasticity is low the expected policy outcome gets further away from the socially desirable policy set this substitution of policy quality for aid can help to explain the poor performance of aid in improving policy perhaps more surprising is the opposite case which arises for high values of elasticity of marginal utility an increase in aid tilts the equilibrium policy towards the welfare maximizing policy set

aid and growth what does the cross country evidence really show abstract we examine the effects of aid on growth in cross sectional and panel data after correcting for the possible bias that poorer or stronger growth may draw aid contributions to recipient co

unconditional aid and green growth abstract environmentally motivated aid can help developing countries to achieve economic growth while mitigating the impact on emission levels we argue that the usual practice of giving aid conditionally is not effective and we therefore study aid that is given unconditionally our framework is a differential open loop stackelberg game between a fully developed leader country and a developing follower country the leader chooses the amount of mitigation aid given to the follower which the follower either consumes or invests in either costly non polluting capital or cheap high emission capital we show that giving aid conditionally is only rarely effective and if so is based on a forced intertemporal savings effect in all other cases it is ineffective at best and counterproductive at worst moreover we find that the leader gives unconditional mitigation aid only when sufficiently rich or when caring sufficiently about environmental quality if unconditional aid is given in steady state it decreases the steady state level of high emission capital and capital investments in the recipient country as well as the global pollution stock but it has no effect on the levels of non polluting capital and non polluting investments transitional aid accelerates the economic growth of the follower moreover we find that the increase in growth takes place in the non polluting sector

contracting for aid abstract foreign aid is analyzed as a contract where the north gives a transfer to the south in return for poverty reduction regarded as an international public good the issue of conditionality is first discussed in a moral hazard framework and then under asymmetric information about the degree of altruism of the government of the south additional actors like local ngos and multilateral aid institutions are then added to the model the optimal contracts to avoid free riding or collusion are then presented

the dynamics of public support for coalition governments this article investigates the relationship between economic conditions and party support for coalition parties in denmark and the netherlands the article argues that the simple reward punishment model cannot fully account for changes in citizens support for parties given variable economic performance using aggregate public support data for political parties the article shows that citizens differentiate between coalition partners depending on the parties issue priorities instead of blaming or rewarding all coalition parties in a uniform fashion citizens shift support from one coalition party to another depending on the perceived competence of a party to deal with particular economic problems the article finds that the structure of responsibility in parliamentary democracies ruled by coalition governments is more complex than is often assumed therefore it is argued that students of economics and public opinion should pay particular attention to the institutional context in which citizens make ch

competition for environmental aid and aid fungibility abstract aid from environmentally conscious donors to developing recipients has long been thought of as a very promising way of preserving the global environment however aid is fungible and recipients cannot commit to using it for the purpose it was intended we analyze competition for aid games with aid fungibility and cross border pollution to gain insights on how to allocate environmental aid more efficiently we set up a two stage game of two recipients receiving aid from a donor interested in minimizing pollution recipients cannot commit on the use of aid but they can commit on the infrastructure necessary to use aid for pollution abatement we find that the success of competition for aid games depends critically on the degree of cross border pollution this determines whether it is more efficient to set up such games between recipients with little or a lot of cross border pollution between them

conditionalities and the performance of european structural funds a principal agent analysis of control mechanisms in eu cohesion policy bachtler j and ferry m conditionalities and the performance of european structural funds a principal agent analysis of control mechanisms in european union cohesion policy regional studies in the context of debates on the performance of european union cohesion policy this paper considers how the european union has used control mechanisms to influence the use of structural funds by member states using the principal agent model this paper examines empirically three case studies of conditionalities applied to the absorption of funding decommitment rule outcomes of interventions performance reserve and targeting of expenditure earmarking in european union programmes over the 2000 2013 period the findings reveal different levels of effectiveness of the three conditionalities attributable to the differential scope for trade offs during the regulatory negotiations external pressure and principal self interest the paper discusses an effectiveness threshold for introducing controls the tensions