Fueling Conflict? (De)Escalation and Bilateral Aid

43 Pages Posted: 18 Nov 2016

See all articles by Richard Bluhm

Richard Bluhm

Leibniz University Hannover; UNU-MERIT; Maastricht Graduate School of Governance

Martin Gassebner

ETH Zurich - KOF Swiss Economic Institute; CESifo (Center for Economic Studies and Ifo Institute)

Sarah Langlotz

Goettingen University

Paul Schaudt

Leibniz Universität Hannover; University of St. Gallen

Date Written: October 18, 2016


This paper studies the effects of bilateral foreign aid on conflict escalation and de-escalation. We make three major contributions. First, we combine data on civil wars with data on low level conflicts in a new ordinal measure capturing the two-sided and multifaceted nature of conflict. Second, we develop a novel empirical framework. We propose a dynamic ordered probit estimator that allows for unobserved heterogeneity and corrects for endogeneity. Third, we identify the causal effect of foreign aid on conflict by predicting bilateral aid flows based on electoral outcomes of donor countries that are exogenous to recipients. We establish that the effect of foreign aid on the various transition probabilities is heterogeneous and can be substantial. Receiving bilateral aid raises the chances of escalating from small conflict to armed conflict, but we find no evidence that aid ignites conflict in truly peaceful countries.

Keywords: conflict, foreign aid, political economy, dynamic ordered panel data

JEL Classification: D740, F350, O110, C250

Suggested Citation

Bluhm, Richard and Gassebner, Martin and Langlotz, Sarah and Schaudt, Paul and Schaudt, Paul, Fueling Conflict? (De)Escalation and Bilateral Aid (October 18, 2016). CESifo Working Paper Series No. 6125, Available at SSRN: https://ssrn.com/abstract=2871174

Richard Bluhm

Leibniz University Hannover ( email )

Institute of Macroeconomics
Koenigsworther Platz 1
Hannover, 30167

HOME PAGE: http://mak.uni-hannover.de

UNU-MERIT ( email )

Keizer Karelplein 19
Maastricht, 6211TC

Maastricht Graduate School of Governance ( email )

Keizer Karelplein 19
PO Box 616
Maastricht, 6200MD

Martin Gassebner (Contact Author)

ETH Zurich - KOF Swiss Economic Institute ( email )

Weinbergstrasse 35
Zurich, 8092

HOME PAGE: http://www.kof.ethz.ch/chair/

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679

Sarah Langlotz

Goettingen University ( email )

Platz der Göttinger Sieben 5
Professur für Entwicklungsökonomik (Prof. Fuchs)
Goettingen, DE 37073

HOME PAGE: http://https://sites.google.com/view/sarah-langlotz/home

Paul Schaudt

University of St. Gallen ( email )

Bodanstrasse 8
St.Gallen, 9000

Leibniz Universität Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167

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