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Interactions Among Donors'Aid Allocations: Evidence from an Exogenous World Bank Income Threshold

29 Pages Posted: 20 Apr 2016  

Stephen Knack

World Bank - Development Research Group (DECRG)

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Ben Zou

Michigan State University

Date Written: September 1, 2014

Abstract

This study investigates the effects of the World Bank's exogenously-determined income threshold for eligibility for concessionary International Development Association (IDA) loans on the allocations of bilateral donors. The donors might interpret the World Bank's policies and allocations across recipients as informative signals of where their own aid might be used most effectively. Alternatively, other donors might compensate for reduced IDA allocations by increasing their own aid. This paper shows that the signaling effect dominates any crowding out effects. The analysis uses panel data with country fixed effects and finds that aid from the bilateral donor countries is significantly reduced after countries cross the IDA income cutoff, controlling for other determinants of aid. Allocations by other donors are not sensitive to actual IDA disbursements, only to the IDA income threshold. Because crossing the income cutoff for eligibility significantly reduces aid levels from other donors as well as from the World Bank, government officials in recipient countries may have an incentive to manipulate their national accounts data to understate per capita income when it is near the IDA threshold. However, tests for "bunching" of observations just below the income threshold find no evidence to support data manipulation concerns. These findings suggest that graduation from IDA should be an even more gradual process than it already is, to dampen the sharp drops in aid experienced by countries after crossing an arbitrary income threshold.

Keywords: Fiscal & Monetary Policy, Public Sector Management and Reform, Non Governmental Organizations, Consumption, Economics and Institutions

Suggested Citation

Knack, Stephen and Xu, Lixin Colin and Zou, Ben, Interactions Among Donors'Aid Allocations: Evidence from an Exogenous World Bank Income Threshold (September 1, 2014). World Bank Policy Research Working Paper No. 7039. Available at SSRN: https://ssrn.com/abstract=2498789

Stephen Knack (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-9712 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/sknack

Lixin Colin Xu

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

Ben Zou

Michigan State University ( email )

486 W. Circle Drive
110 Marshall-Adams Hall
East Lansing, MI 48824
United States

HOME PAGE: http://zouben.weebly.com/

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