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

44 Pages Posted: 25 May 2011

See all articles by Hannes Öhler

Hannes Öhler

University of Goettingen (Gottingen)

Peter Nunnenkamp

University of Kiel

Axel Dreher

Heidelberg University

Date Written: May 19, 2011

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.

Keywords: foreign aid, corruption, Millennium Challenge Corporation, MCC effect

JEL Classification: F350, O170

Suggested Citation

Öhler, Hannes and Nunnenkamp, Peter and Dreher, Axel, Does Conditionality Work? A Test for an Innovative US Aid Scheme (May 19, 2011). CESifo Working Paper Series No. 3454. Available at SSRN: https://ssrn.com/abstract=1846428

Hannes Öhler

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Peter Nunnenkamp

University of Kiel ( email )

D-24100 Kiel
Germany

Axel Dreher (Contact Author)

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

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

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