Eenie, Meenie, Miney, Moe? Institutional Portfolios and Delegation to Multilateral Aid Institutions

Abstract

This paper develops a theory of governments’ strategic choice in delegating aid between multi-lateral aid institutions (MAIs). Although delegation of aid to multilateral institutions increases the overall value of development aid, governments do not benefit from this efficiency if the de facto MAI development strategies do not fall in line with the government's own allocation interests. We argue that governments can mitigate this problem by building an institutional portfolio of aid. In other words, governments take into account the existence of various, oftentimes over-lapping, aid institutions and contribute varying amounts to these institutions such as to maximize efficiency and similarity of allocation policies between government and MAI. The closer the MAI's aid allocation reflects the development goals of the donor and the greater the MAI's efficiency, the more likely it will delegate aid to that MAI over others. We use data on financial contributions of 23 OECD states to MAIs from 1977 to 2008 to analyze a donor government’s strategic choice. The empirical analyses robustly support the main theoretical claim. Governments make strategic choices and build institutional portfolios that aim at mitigating the problem of power diffusion in MAIs.