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UNU-WIDER Foreign Aid as Prize: Incentives for a Pro-Poor Policy

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A teenager wears torn rubber boots in a muddy local market in Bac Ha, Viet Nam. As of 2005 figures, half the world population—more than 3 billion people–is estimated to live on less than USD 2.50 a day. Bac Ha, Viet Nam. UN Photo/Kibae Park.

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Foreign Aid as Prize: Incentives for a Pro-Poor Policy

We develop a theoretical model of foreign aid to analyse a method of disbursement of aid which induces the recipient government to follow a more pro-poor policy than it otherwise would do. In our two-period model, aid is given in the second period and the volume of it depends on the level of wellbeing of the target group in the first period. We find that this way of designing aid does increase the welfare of the poor. We also consider the situations where the donor and the recipient governments act simultaneously as well as sequentially, and find that by moving first in a sequential game, the donor country can, under certain conditions, increase the welfare of the poor and its own compared to the case of simultaneous moves.
Publisher:
UNU-WIDER
Series:
WIDER Research Paper
Volume:
2008/63
Title:
Foreign Aid as Prize: Incentives for a Pro-Poor Policy
Authors:
Tejashree Sayanak and Sajal Lahiri
Publication date:
June 2008
ISSN Web:
1810-2611
ISBN 13 Web:
9789292301132
Copyright holder:
© UNU-WIDER
Copyright year:
2008
Keywords:
foreign aid, fungibility, governance, welfare, prize
JEL:
D63, F35
Project:
Conference on 'Aid: Principles, Policies and Performance'
Sponsor:
UNU-WIDER gratefully acknowledges the financial contribution to the conference by the Finnish Ministry for Foreign Affairs.
Format:
online

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