small trust funds as opposed to large trust funds.

We measure preference heterogeneity by calculating the coefficient of variation in the sectoral shares of bilateral aid, for the sector(s) relevant to the respective trust funds, by all donors covered in the OECD/DAC’s Creditor Reporting System (CRS) (OECD 2014b).<sup>8</sup> Admittedly, this measure is imperfect as donors may have different preferences over subsectors (such as primary vs. secondary education) within a sector, or about specific goals (such as enrollment vs. quality of schooling). Yet, this method is consistent with other studies that use bilateral aid to measure and compare individual donor preferences (e.g., Lyne, Nielson, and Tierney 2009; Schneider and Tobin 2013) and to measure preference heterogeneity (e.g., Copelovitch 2010).<sup>9</sup> Note that donor preferences over sectoral allocations may differ even if their aid is motivated purely by development objectives. For ideological or other reasons some donors, for example, may emphasize government provision of education and health services as the crucial path to development while others may emphasize private sector development. However, donors may have differing sectoral preferences for geopolitical or commercial reasons as well. Either explanation is consistent with Hypothesis 1.

Other hypotheses can be more clearly associated with donor motives, whether "donor interest" or "recipient need." As emphasized in the aid allocation literature, the promotion of a donor’s commercial and geopolitical interests is often a strong motivation for development assistance. Where such interests are at stake, donors’ preferences will tend to differ much more than when their aid is responding to recipient need. In this situation – where donors may compete rather than cooperate with each other – adding more donors to a fund may drastically reduce the benefits to each sovereign donor. Donor competition for trade access or other commercial and geopolitical objectives will be particularly strong regarding aid to middle-income countries (MICs). Compared to low-income countries, recipient need is lower in MICs, and potential commercial benefits to donors are greater. We can thus formulate our second hypothesis:

**Hypothesis 2** A donor should channel its support for middle-income countries through small trust funds as opposed to large trust funds.

To group countries into middle-income and other developing countries, we use an indicator variable based on the standard World Bank classification (see World Bank 2014b).

An economic downturn in the donor country can lead to increased emphasis on the use of aid for donor interests and specifically for commercial benefits, rather than for development objectives broadly shared within the donor community. Particularly when unemployment is relatively high in the donor country, combating poverty at home will become more of

> 8 See Table A-2 in the Annex for a full definition.

> 9 Sectoral preferences are obviously not a comprehensive measure of donor preferences. We considered, but rejected, heterogeneity measures based on bilateral donors’ geographic preferences. Many trust funds are global in scope, in contrast to most bilateral aid programs, and for them preference heterogeneity among donors’ country allocations is not relevant.

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