Aid and Sanctions

Kletzer, Kenneth M.

doi:10.2139/ssrn.1281149

Cited by 3 publications

(4 citation statements)

References 24 publications

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“…From a theoretical point of view, Cordella et al . () and Kletzer () show that a renegotiation‐proof equilibrium is characterized by aid flows in punishment that are smaller than those made in equilibrium. In our theoretical setup, if we allow for reduced transfers in punishment, then the value of breaching the conditionality contract becomes larger, so the recipient government's incentives to defect increase.…”

Section: The Modelmentioning

confidence: 99%

“…As the sovereign recipient government may not be willing to keep the conditions, conditionality can be interpreted as an imperfectly enforceable contract between the donor and the recipient government; see, for example, Besley and Persson (), Cordella et al . (), Kletzer () and Cordella and Dell’Ariccia ().…”

Section: Introductionmentioning

confidence: 99%

“… In similar setups, Cordella and Dell’Ariccia () contrast conditional budget support and project aid, while Kletzer () focuses on the credibility of aid sanctions. …”

mentioning

confidence: 99%

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Debt Relief for Poor Countries: Conditionality and Effectiveness

Scholl

2016

Economica

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This paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries. We develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government, and model conditionality as an imperfectly enforceable dynamic contract. In contrast to the recent practice of fully cancelling debt, optimal incentive-compatible conditionality is accompanied by a concessionality level that implies a combination of subsidized loans and outright grants. The optimal concessionality level depends on the recipient's access to international financial markets and on the strength of the conflict of interest. Incentive-compatible transfers with optimal concessionality levels generate substantial welfare gains. If the donor does not implement the optimal concessionality level and provides subsidized loans only, then the effectiveness of transfers decreases in the long run with severe welfare implications. In contrast, transfers are less effective in the short run if the donor offers outright grants only.

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Section: The Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Debt Relief for Poor Countries: Conditionality and Effectiveness

Scholl

2016

Economica

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“…This is because donors view aid as a public good and the rise in aid due to coordination would crowd out the government's incentive to spend on the poor. Kletzer (2005) shows that repeated interaction can also incentivize governments to spend on the poor, while Azam and Laffont (2003) derive optimal aid contracts when the private information of a government leads to moral hazard and adverse selection.…”

Section: Introductionmentioning

confidence: 99%

Aid and the Soft Budget Constraint

Janus

2009

Review Development Economics

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This paper applies the theory of the soft budget constraint to explain some stylized facts regarding the outcomes and practice of international aid, including ineffectiveness, white elephants, and volatility. The soft budget constraint can also make aid counterproductive.Nonetheless, actual aid institutions may be constrained optimal responses to soft budgets and commonly suggested reforms such as improved donor coordination, focus on fewer countries and projects, and less volatility may lower the effectiveness of aid. The soft budget is also consistent with conservative project selection and the recent focus on "ownership".

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Aid effectiveness and limited enforceable conditionality

Scholl

2009

Review of Economic Dynamics

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This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modeled as a limited enforceable dynamic contract. We define the contract to be selfenforcing if, at any point in time. the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that optimal self-enforcing conditional aid strongly stimulates the developing economy and substantially increases welfare. However. aid effectiveness comes at a high cost: to ensure enforceability. less benevolent political regimes receive permanently larger aid funds in return for a less intense conditionality.Foreign aid has been a substantial source of income in developing economies. As an example consider the case of Africa: on average aid funds amount to 11% of recipient's GDP.1 The stated intention of development assistance programs is to reduce poverty and to promote economic growth. However, the stagnating growth pattern in African countries calls the effectiveness of aid into question. 2 This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. We take into account that, instead of implementing economic policies that coincide with the donor's intention, the recipient government may follow 'bad' policies and use aid funds e.g. to assist political supporters or to finance military interventions. To prevent the government from doing so, it has become a common donor policy to impose conditions that specilY how foreign aid funds should be allocated. However, since the recipient country is sovereign, its government may not be willing to keep the conditions. The focus of this paper is to analyze the optimal design of incentive compatible aid conditionality. We follow the recent literature on limited commitment in dynamic macroeconomic settings and describe aid conditionality as an imperfectly enforceable dynamic contract between the donor and the recipient country.3 To ensure that the recipient government coop-

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Aid and Sanctions

Cited by 3 publications

References 24 publications

Debt Relief for Poor Countries: Conditionality and Effectiveness

Debt Relief for Poor Countries: Conditionality and Effectiveness

Aid and the Soft Budget Constraint

Aid effectiveness and limited enforceable conditionality

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