of aid is reduced when there are too many duplicating initiatives, especially at country and sector levels.” It commits a broad range of aid providers to “reduce the fragmentation of aid by improving the complementarity of donors’ efforts and the division of labor among donors, including through improved allocation of resources within sectors, within countries, and across countries.” OECD (2009) suggests that donors re-allocate some of their aid from “non-significant” to “significant” relationships (those where aid is relatively small from both the donor’s and recipient’s standpoints).

Some observers, however, warn about harmful effects on recipients from excessive donor harmonization. Rogerson (2005) and Frot and Santiso (2009) note that a low Herfindahl index is interpreted as an indicator of healthy competition among firms in the economics of industrial organization literature, and argue that high aid fragmentation (measured by one minus the Herfindahl index) may similarly reflect more competition among donors, to the benefit of recipients. The DAC itself (OECD, 2011, Ch. 4) in describing the costs of fragmentation also acknowledges that a recipient may benefit from having a diversified set of funding sources and from working with numerous donor agencies with different areas of expertise. “In addition to the policy autonomy that might be forfeited” from dependence on one key donor, ”the recipient would also likely face a riskier ODA environment” if subject to the foreign policy whims and changes in economic circumstances of a single large bilateral donor (Rowlands and Ketcheson, 2002). A donor agency evaluation found that government officials in some countries (including Benin and Malawi) favored a single assistance strategy guiding all donors’ activities in their countries, but other governments were not interested, “as they preferred to have options, which would be undermined if donors coordinated on a joint strategy” (IEG, 2011). In general, therefore, benefits to the recipient from this competition, diversity of ideas and more consistent flow of total funds should be balanced against the higher transactions costs of fragmentation (Rogerson, 2005). Gibson et al. (2005) and Frot and Santiso (2009) assert more specifically that donors with monopoly power in a country may exploit it by tying more of their aid. If so, progress toward an improved division of labor among donors could slow progress on untying aid.

While the monopoly argument implies that aid fragmentation should reduce the incidence of aid tying, other views of donor-recipient interactions imply there should be no relationship. Easterly (2002) agrees that aid fragmentation imposes more transactions costs on recipients, but believes it does not materially affect the balance of power between a recipient and donor. Donors in a recipient country act as a de facto cartel, in Easterly’s view, whether they are few or numerous. Munro (2005) is skeptical of claims regarding the benefits of concentrating a donor’s aid on fewer countries and sectors, noting a dearth of systematic empirical evidence, but he is also skeptical that a typical donor can increase its leverage with a recipient government by increasing its share of the aid market in the country. This view of limited donor influence contrasts starkly to Easterly’s, but both views suggest that a donor’s ability to impose its will on a recipient government is unrelated to its share of the aid market in the country. Finally, aid markets may be highly contestable even in countries where we observe few donors operating in equilibrium. Recipients have been known to accept aid from certain donors while rejecting it from others they find less compatible for one reason or another. In empirical tests of the link between fragmentation 4