Does Conditionality Work? A Test for an Innovative US Aid Scheme
44 Pages Posted: 25 May 2011
Date Written: May 19, 2011
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.
Keywords: foreign aid, corruption, Millennium Challenge Corporation, MCC effect
JEL Classification: F350, O170
Suggested Citation: Suggested Citation