Limits of Conditionality in Poverty Reduction Programs
International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)
IMF Working Paper No. 02/115
When donors and recipients have different preferences over budgetary allocations, conditionality helps the implementation of donor-financed poverty reduction programs. If donors cannot perfectly monitor all recipients' actions, however, conditionality entails an inefficient allocation of resources. Under such conditions, the optimal amount of conditionality varies (often not monotonically) with the recipients' degree of social commitment. Finally, if recipients' preferences are not observable, conditionality can be used to prevent recipients with a weak commitment to poverty reduction from obtaining aid funds. This may, however, lead to further distortions in terms of resource allocation and to phenomena of aid rationing.
Number of Pages in PDF File: 24
Keywords: Aid, Poverty Reduction, Conditionality, Asymmetric Information
JEL Classification: D8, I3working papers series
Date posted: October 21, 2002
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