Looking Ahead Optimally in Allocating Aid

Abstract:     
The Collier-Dollar approach to aid allocation has been less than fully embraced by donors - even those focused on poverty reduction - and has come into conflict with a different approach based on the Millennium Development Goals. These two approaches are shown to be special cases of a more general model of optimal aid allocation, in which donors care about future as well as current poverty. The model is illustratively applied to data for developing regions. Adding a poverty decline adjustment to the allocation formulae now used by aid agencies would make these formulae more efficient and more acceptable.

Keywords: aid, optimal allocation, world poverty, Millennium Development Goals

JEL Classifications: F35, I30

Working Paper Series