Abstract:

We develop a political–economic model of aid fungibility: a part of aid is diverted away from its intended target by lobby groups. The size of this diversion – the degree of aid fungibility – is determined endogenously by the recipient government. The donor can affect the equilibrium degree of fungibility by choosing both the size of aid and the timing of its decision. We derive a condition under which the donor's reaction to fungibility is to reduce the amount of aid. Under this condition, if the donor acts as a follower, both the donor and the target group are better off.

Document Type: Research article

DOI: 10.1111/j.1468-0343.2004.00138.x

Affiliations: 1: Southern Illinois University, Carbondale, USA, and University of Essex, UK 2: Copenhagen Business School, Denmark; EPRU, CEPR, and CESifo