Amegashie, J. Atsu and Ouattara, Bazoumanna and Strobl, Eric (2007): Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid.
Download (260Kb) | Preview
The paper presents a theoretical and empirical analysis of a donor’s choice of the composition of unrestricted and in-kind/restricted transfers to a recipient and how this composition is adjusted in response to changes in the moral hazard behavior of the recipient. In-kind or restricted transfers may be used, among others, to control a recipient’s moral hazard behavior but may be associated with deadweight losses. Within the context of foreign aid, we use a canonical political agency model to construct a simple signaling game between a possibly corrupt politician in a recipient country and a donor to illustrate the donor’s optimal choice of tied (restricted) and untied foreign aid. We clarify the condition under which a reduction in the recipient’s moral hazard behavior (i.e., improvement in the level of governance) leads to a fall in the proportion of tied aid. We test the predictions of our theoretical analysis using data on the composition of foreign aid by multilateral and bilateral donors.
|Item Type:||MPRA Paper|
|Original Title:||Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid|
|Keywords:||tied foreign aid; governance; moral hazard; political agency; restricted transfer|
|Subjects:||F - International Economics > F3 - International Finance > F35 - Foreign Aid
D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy; Administrative Processes in Public Organizations; Corruption
I - Health, Education, and Welfare > I3 - Welfare and Poverty > I38 - Government Policy; Provision and Effects of Welfare Programs
|Depositing User:||J. Atsu Amegashie|
|Date Deposited:||10. May 2007|
|Last Modified:||17. Feb 2013 08:36|
Alesina, A., and Dollar, D. 2000. Who Gives Foreign Aid to Whom and Why? Journal of Economic Growth 5: 33-63.
Barro, R.J. 1973. The Control of Politicians: An Economic Model. Public Choice 14: 19-42.
Besley, T. 2006. Principled Agents? The Political Economy of Good Government, The Lindahl Lectures. Oxford University Press, Oxford.
Besley, T., and Case, A. 1995. Incumbent Behavior: Voting Seeking, Tax Setting, and Yardstick Competition. American Economic Review 85: 25-45.
Besley, T., and Coate, S. 1991. Public Provision of Private Goods and the Redistribution of Income. American Economic Review 81: 979-984.
Besley, T., and Coate, S. 1992. Workfare Versus Welfare: Incentive Arguments for Work Requirements in Poverty Alleviation Programs. American Economic Review 82: 249-261.
Besley, T., and Prat, A. 2006. Handcuffs for the Grabbing Hand?: Media Capture and Government Accountability. American Economic Review, forthcoming. http://econ.lse.ac.uk/staff/prat/papers/media.pdf
Besley, T., and Smart, M. 2007. Fiscal Restraints and Voter Welfare. Journal of Public Economics 91: 755-773.
Blackorby, C., and Donaldson, D. 1988. Cash Versus Kind, Self Selection, and Efficient Transfers. American Economic Review 78: 691-700.
Boadway, R. W. 1997. Public Economics and the Theory of Public Policy. Canadian Journal of Economics 30: 753-72.
Boadway, R. W. 1998. The Mirrlees Approach to the Theory of Economic Policy. International Tax and Public Finance 5: 67-81.
Bruce, N., and Waldam, M. 1991. Transfers in Kind: Why They Can be Efficient and Nonpaternalistic. American Economic Review 81: 1345-1351.
Buchanan, J. 1975. The Samaritan’s Dilemma. In E. Phelps (ed), Altruism, Morality and Economic Theory. New York: Russel Sage Foundation.
Burnside, C., and Dollar, D. 2000. Aid, Policies, and Growth. American Economic Review 90: 847-868.
Burnside, C., and Dollar, D. 2004. Aid, Policies, and Growth: Reply. American Economic Review 94: 781-784.
Cassen, R., and Associates. 1994. Does Aid Work? 2nd edition. Oxford: Oxford University Press.
Coate, S. 1989. Cash versus Direct Food Relief. Journal of Development Economics 30: Pages 199-224.
Coate, S. 1995. Altruism, the Samaritan’s Dilemma, and Government Transfer Policy. American Economic Review 85: 46-57.
Coate, S., and Morris, S. 1995. On the Form of Transfers to Special Interests. Journal of Political Economy 105: 1210-1235.
Commission for Africa. 2005. Our Common Interest: Report of the Commission for Africa. London
Danzinger, S., Haveman, R., and Plotnick, R. 1981. How Income Transfer Programs Affect Work, Savings, and Income Distribution: A Critical Review. Journal of Economic Literature 19: 975-1028.
Dollar, D., and Levin, V. 2004. The Increasing Selectivity of Foreign Aid: 1984-2002. World Bank Policy Research Paper 3299.
Dollar, D., and Levin, V. 2006. The Increasing Selectivity of Foreign Aid: 1984-2003. World Development 34: 2034-2046.
Easterly, W. 2001. The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. Cambridge, MA: MIT Press.
Easterly, W., Levine, R., and Roodman, D. 2004. New Data, New Doubts: A Comment on Burnside and Dollar’s “Aid, Policies, and Growth (2000). American Economic Review 94: 253-259.
Easterly, W. 2006a. The White Man’s Burden: Why the West’s Effort to Aid the Rest Have Done So Much Ill and So Little Good. New York: Penguin Press.
Easterly, W. 2006b. Are Aid Agencies Improving? Economic Policy, forthcoming.
Ferejohn, J. 1986. Incumbent Performance and Electoral Control. Public Choice 50: 5-25.
Fraker, T., and Moffitt, R. 1988. The Effect of Food Stamps on Labor Supply: A Bivariate Selection Model. Journal of Public Economics 35: 25-56.
Gates, S., and Hoeffler, A. 2004. Global Aid Allocation: Are Nordic Donors Different? CSAE Working Paper No. 2004-34. Oxford: Center for the Study of African Economies, University of Oxford.
Gahvari, F., and de Mattos, E.C. 2007. Conditional Cash Transfers, Public Provision of Private Goods and Income Redistribution. American Economic Review 97: 491-502.
Glaeser, E.L., La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. 2004. Do Institutions Cause Growth. Journal of Economic Growth 9: 271-303.
Jepma, C.J. 1991. The Tying of Aid. Paris: OECD. Availaible at http://www.oecd.org/dataoecd/16/56/29412505.pdf
Kanbur, R., Sandler, T., and Morrison, K. 1999. The Future of Development Assistance: Common Pools and International Public Goods. Washington, D.C.: Overseas Development Council, Policy Essay No. 25, Johns Hopkins University Press.
Kanbur, R. 2006. The Economics of International Aid. In Serge-Christophe Kolm and Jean Mercier Ythier (eds.), Handbook of the Economics of Giving, Altruism and Reciprocity, Elsevier.
Kemp, M.C., and Kojima, S. 1985. Tied Aid and the Paradoxes of Donor-Enrichment and Recipient-Improvement. International Economic Review 26: 721-729.
Knack, S. and Rahman, A. 2007. Donor Fragmentation and Bureaucratic Quality in Aid Recipients. Journal of Development Economics 83: 176-197.
Kuziemko, I., and Werker, E. 2006. How Much is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations. Journal of Political Economy 114: 905-930.
Lahiri, S., and Raimondos, P. 1995. Welfare Effects of Aid under Quantitative Trade Restrictions. Journal of International Economics 39: 297-315.
Maizels, A., and Nissanke, M.K. 1984. Motivations for Aid to Developing Countries. World Development 12: 879-900.
Martens, B., Mummert, U., Murrell, P., and Seabright, P. 2002. The Institutional Economics of Foreign Aid. Cambridge University Press, Cambridge, UK.
Marton, J., and Wildasin, D.E. 2007. State Government Cash and In-Kind Benefits: Intergovernmental Fiscal Transfers and Cross-Program Substitution. Journal of Urban Economics 61: 1-20.
Mavrotas, G, and Villanger, E. 2006. Multilateral Aid Agencies and Strategic Donor Behaviour, WIDER Discussion Paper No.2006/02, World Institute for Development Economics Research of the United Nations University, Helsinki.
McKinlay, R.D., and Little, R. 1979. The US Aid Relationship: A Test of the Recipient Need and Donor Interest Models. Political Studies 27: 236-250.
Mirrlees, J. A. 1971. An Exploration in the Theory of Optimum Income Taxation. Review of Economic Studies 38: 175-208.
Moffitt, R. 1983. An Economic Model of Welfare Stigma. American Economic Review 73: 1023-1035.
Moffitt, R. 1989. Estimating the Value of an In-Kind Transfer: The Case of Food Stamps. Econometrica 57: 385-409.
Moffitt, R. 1990. Has State Redistribution Policy Grown More Conservative? National Tax Journal 43: 123-142.
Moffitt, R. 1992. Incentive Effects of the U.S. Welfare System: A Review. Journal of Economic Literature 30: 1-61.
Mosley, P. 1987. Overseas Aid – its Defense and Reform. Brighton: Wheaton Books.
Neumayer, E. 2003. The Pattern of Aid Giving: The Impact of Good Governance On Development Assistance. Routledge: London.
Nichols, A.L., and Zeckhauser, R.J. 1982. Targeting Transfers Through Restrictions on Recipients. American Economic Review 72: 372-377.
Pedersen, K. 2001. The Samaritan’s Dilemma and the Effectiveness of Development Aid. International Tax and Public Finance 8: 693-703.
Persson, T., Roland, G., and Tabellini, G. 1997. Separation of Powers and Political Accountability. Quarterly Journal of Economics 112: 1163-1202.
Persson, T., and Tabellini, G. 2000. Political Economics: Explaining Economic Policy. The MIT Press, Cambridge.
Radelet, S. (2004). Aid Effectiveness and the Millennium Development Goals. Center for Global Development, Washington, Working Paper 39. http://www.cgdev.org/content/publications/detail/2750.
Sachs, J. 2005. The End of Poverty: Economic Possibilities for Our Time. New York: Penguin Press.
Schultz, T.W. 1960. Value of U.S. Farm Surpluses to Underdeveloped Countries. Journal of Farm Economics 42: 1019-1030.
Schweinberger, A.G. 1990. On the Welfare Effects of Tied Aid. International Economic Review 31: 457-462.
United Nations Development Program. 2005. Human Development Report 2005: International Cooperation at a Crossroads: Aid, Trade, and Security in an Unequal World. United Nations Development Program: New York.
World Bank. 1998. Assessing Aid: What Works, What Doesn’t, and Why. World Bank: Washington DC.