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On the Non-Contractual Nature of Donor-Recipient Interaction in Development Assistance

This paper analyses three issues in strategic donor-recipient interaction motivated by the complexity of the rationale underlying aid. The first is when we have several principals with conflicting objectives. Any one principal cannot offer high powered incentives to the agent to carry out their designated task. The second is to do with the fact that effort associated with ensuring aid effectiveness may concern both principal and agent; the optimal solution to which requires difficult to design cooperative behaviour. Consequently, the contractual type principal-agent relationship between donors and recipients is inappropriate. We need to consider models that signal recipient quality or commitment to reform. A simple model of signalling with commitment problems is presented, along with extensions to multiple types of agents and time periods, as well as possible solutions involving mechanism design.
Publisher:
UNU-WIDER
Series:
WIDER Research Paper
Volume:
2008/71
Title:
On the Non-Contractual Nature of Donor-Recipient Interaction in Development Assistance
Authors:
S. Mansoob Murshed
Publication date:
September 2008
ISSN Web:
1810-2611
ISBN 13 Web:
9789292301255
Keywords:
aid, conditionality, contracting, signalling quality, mechanism design
JEL:
D72, D82, 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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