Does Conditionality Work? A Test for an Innovative US Aid Scheme

CEGE Working Paper No. 103

39 Pages Posted: 18 Jul 2010

See all articles by Hannes Oehler

Hannes Oehler

affiliation not provided to SSRN

Axel Dreher

Heidelberg University

Peter Nunnenkamp

University of Kiel

Date Written: June 20, 2010

Abstract

Performance-based aid has been proposed as an alternative to the failed traditional approach whereby donors make aid conditional on the reform promises of recipient countries. However, hardly any empirical evidence exists on whether ex post rewards are effective in inducing reforms. We attempt to fill this gap by investigating whether the Millennium Challenge Corporation (MCC) was successful in promoting better control of corruption. We employ a difference-in-difference-in-differences (DDD) approach, considering different ways of defining the treatment group as well as different time periods during which incentive effects could have materialized. We find evidence of strong anticipation effects immediately after the announcement of the MCC, while increasing uncertainty about the timing and amount of MCC aid appear to weaken the incentive to fight corruption over time. We conclude that – if designed properly – conditionality can work.

Keywords: Foreign Aid, Corruption, Millennium Challenge Corporation, MCC Effect

JEL Classification: F35, O17

Suggested Citation

Oehler, Hannes and Dreher, Axel and Nunnenkamp, Peter, Does Conditionality Work? A Test for an Innovative US Aid Scheme (June 20, 2010). CEGE Working Paper No. 103. Available at SSRN: https://ssrn.com/abstract=1641175 or http://dx.doi.org/10.2139/ssrn.1641175

Hannes Oehler (Contact Author)

affiliation not provided to SSRN ( email )

Axel Dreher

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Peter Nunnenkamp

University of Kiel ( email )

D-24100 Kiel
Germany

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