# **5. Summary and Conclusion**

In this paper we tested two opposing hypotheses regarding the effect of aid fragmentation on aid tying. Results offer no support for the hypothesis that more concentrated aid confers monopoly power on donors that they exploit by tying more of their aid. Instead, we find strong evidence that lower fragmentation is associated with less aid tying. This result is predicted by a model of donor behavior adapted from Knack and Rahman (2007) and based on collective action theory. In countries where aid is less fragmented across donors, the typical donor has stronger incentives to pursue development objectives rather than commercial (or other) objectives. A given donor operating in multiple recipient countries has a stronger incentive to pursue development objectives where it has a larger share of the total aid market in a country. Our findings are robust to alternative definitions of aid tying, and to a strong set of controls (including donor and recipient fixed effects). Moreover, instrumental variables tests in our panel data support the interpretation that higher donor aid shares reduce aid tying. In our cross-sectional tests, aid tying rises initially as the number of donors increases, but eventually begins to fall. This result - that aid tying is lower not only when there are very few but also very many donors - is not predicted by our theoretical approach, but nor is it consistent with concerns that fewer donors operating in a country implies enhanced leverage on their part to tie more aid. Moreover, in our panel data tests, higher donor aid shares are monotonically associated with lower aid tying.

Aid tying also varies inversely with the costs of aid tying (proxied empirically by donor country size and per capita income), as predicted by the model. We also find that aid to the LDCs is less likely to be tied, indicating that the DAC recommendation on aid untying to least developed countries has influenced donor behavior.

This paper adds to a growing body of empirical evidence on the adverse impact of fragmented aid (Djankov et al., 2009; Knack and Rahman, 2007; Anderson, 2011). Fragmentation indicators (including donor aid shares) are only incomplete measures of the division of labor among donors, and division of labor in turn does not comprise the entire donor harmonization agenda. For example, we do not address fragmentation at the sectoral level, delegation of implementation of aid by one donor to another, or coordinating donor missions or country analytic work. Our model and empirical tests aggregate all ODA to the donor-recipient level. However, our approach could readily be extended to sector-by-sector analyses in further research. For a given donor-recipient pair, one could test the hypothesis that aid tying is lower in sectors where the donor’s aid share is higher, controlling for donor and sector fixed effects.

Despite the limitations of our analysis, it reassuringly finds that the objective of untying more aid does not conflict with with at least one part of the harmonization agenda - increasing geographic specialization of aid by donors. Results instead are consistent with the view that reducing fragmentation - by increasing donors’ share of aid in the countries they assist - enhances their reputational stake in producing favorable development outcomes. Reducing aid fragmentation can occur without donors (individually or collectively) imposing their own preferred geographic division of labor. The Rwandan government, for example, has taken the lead in guiding its donors toward providing support in a more limited number 17