Is Foreign Aid Motivated by Altruism or Self-Interest? A Theoretical Model and Empirical Test

42 Pages Posted: 4 Feb 2014

See all articles by Andrea Civelli

Andrea Civelli

University of Arkansas

Andrew W. W. Horowitz

University of Arkansas - Sam M. Walton College of Business

Arilton Teixeira

FUCAPE Business School

Date Written: January 31, 2014

Abstract

Why do some countries give foreign aid to poorer countries and what is its effect on recipient growth? Many decades of research has not provided definitive answers to either of these questions. One obstacle to answering these linked questions is that unobserved donor motivation may create an endogeneity bias that complicates measurement of aid effectiveness. We develop a theoretical model that generates a signal of altruistic donor motivation and find it present in approximately one-fifth of a large set of donor-recipient pairs. We explore the external validity of our signal in the standard growth regressions and find evidence that aid from donors' displaying our altruistic signal yields distinguishable and higher benefits for the recipients. Our model generates a new method to disentangle altruistic and self-interest motivations in foreign-aid donations, and may be applicable to broad classes of voluntary transfers.

Keywords: Foreign Aid, Altruism, Welfare Analysis, Bilateral Donors, Business Cycles

JEL Classification: E22, E32, O11, O19

Suggested Citation

Civelli, Andrea and Horowitz, Andrew W. and Teixeira, Arilton, Is Foreign Aid Motivated by Altruism or Self-Interest? A Theoretical Model and Empirical Test (January 31, 2014). Available at SSRN: https://ssrn.com/abstract=2390448 or http://dx.doi.org/10.2139/ssrn.2390448

Andrea Civelli (Contact Author)

University of Arkansas ( email )

Fayetteville, AR 72701
United States

HOME PAGE: http://comp.uark.edu/~acivelli/

Andrew W. Horowitz

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Arilton Teixeira

FUCAPE Business School ( email )

Fernando Ferrari Avenue, 1358
Goiabeiras
Vitória, Espirtio Santo 29075-010
Brazil

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