Donor Competition for Aid Impact, and Aid Fragmentation

38 Pages Posted: 1 Nov 2012

See all articles by Kurt Annen

Kurt Annen

University of Guelph - Department of Economics

Luc Moers

University of Guelph - Department of Economics and Finance

Date Written: August 2012

Abstract

This paper shows that donors that maximize relative aid impact spread their budgets across many recipient countries in a unique Nash equilibrium, explaining aid fragmentation. This equilibrium may be inefficient even without fixed costs, and the inefficiency increases in the equality of donors' budgets. The paper presents empirical evidence consistent with theoretical results. These imply that, short of ending donors' maximization of relative aid impact, agreements to better coordinate aid allocations are not implementable. Moreover, since policies to increase donor competition in terms of aid effectiveness risk reinforcing relativeness, they may well backfire, as any such reinforcement increases aid fragmentation.

Keywords: Aid Effectiveness, Aid Fragmentation, Donor Competition, Donor Coordination, Economic Models, Resource Allocation

JEL Classification: D70, O19, F35, H87

Suggested Citation

Annen, Kurt and Moers, Luc, Donor Competition for Aid Impact, and Aid Fragmentation (August 2012). IMF Working Paper No. 12/204, Available at SSRN: https://ssrn.com/abstract=2169750

Kurt Annen (Contact Author)

University of Guelph - Department of Economics ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

Luc Moers

University of Guelph - Department of Economics and Finance ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

HOME PAGE: http://linkedin.com/in/lmoers

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