Resource title

Moral hazard and the composition of transfers: theory with an application to foreign aid

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Resource description

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.

Resource author

J. Atsu Amegashie, Bazoumana Ouattara, Eric Strobl

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/26041

Resource license

Adapt according to the presented license agreement and reference the original author.