# **1 Introduction**

Existing theory suggests fundamental tradeoffs in the allocation of foreign aid. When choosing between bilateral aid and multilateral aid, donors trade off the ability to fully control disbursement decisions against the possibility to share the burden with other donors (Milner and Tingley 2013). Similarly, when choosing among different multilateral agencies, donors consider both the efficiency of the agency and the degree to which the donors find their own preferences aligned with the other donor countries supporting the agency (Schneider and Tobin 2013).

While established work considers the dichotomous choice of sovereign donors between bilateral aid and multilateral aid, it neglects the whole range of options on the continuum between these two extremes. These options have multiplied with the ascent of "multi-bi" aid since the early 1990s. Multi-bi aid refers to earmarked contributions by donor countries to international development organizations to support specific development purposes, notably specific themes, sectors, or countries (OECD 2011). Such contributions are funneled into trust funds housed at multilateral agencies, which are financial vehicles governed by administrative agreements between bilateral donors and a multilateral agency serving as trustee (Droesse 2011). For the bilateral donors, these trust funds appear to combine the advantages of the two conventional types of aid. On the one hand, they can harness the benefits of multilateral delegation such as economies of scale, reduced fragmentation, improved coordination, and knowledge dissemination (IEG 2011; Tortora and Steensen 2014). On the other hand, they make the multilateral agency more directly accountable to individual donors than in the case of "core" contributions to multilateral funds such as IDA (OECD 2011; Sridhar and Woods 2013; Graham 2015a). Tailor-made governance arrangements enable the donor(s) to specify the terms of their cooperation, potentially even including bilateral staff exchange, and tailored reporting on program results. Trust funds also imply a high degree of flexibility, since they do not need approval by the formal governing bodies of multilateral organizations. Trust funds can even support activities beyond the formal mandate of multilateral organizations. From this perspective, multi-bi aid hence resembles bilateral aid.<sup>1</sup> Since the turn of the millennium, trust funds at international development organizations have grown massively. With a volume of 19 billion USD in 2012, multi-bi aid today comprises about 20% of bilateral aid and is almost 60% as large as the total volume of multilateral aid (Reinsberg, Michaelowa, and Eichenauer 2015). At the World Bank, annual trust fund contributions quadrupled within five years shortly after the millennium. Currently, the Bank receives annual contributions of about USD 4 billion (excluding funds for which the Bank only provides financial intermediary services), and these funds finance 10 percent of the

> 1 In this paper, "bilateral aid" refers only to classical (or "pure") bilateral assistance excluding multi-bi aid, which we count as a separate category. This is in contrast to the OECD/DAC statistics that account for multi-bi aid as part of bilateral aid.