Does Foreign Aid Harm Local Institutions? External Subsidies, Giving Behavior, and Social Norms in a Lab Experiment

Abstract

Evidence for the long-term effects of foreign aid on local communities is mixed. In a laboratory experiment, we investigate whether external subsidies, e.g. foreign assistance, promote or undermine giving. Subjects play two rounds of a dictator game followed by an elicitation of norms. In both rounds, leaders allocate earned endowments to passive recipients. With a between-subject design, we vary the presence of a subsidy and compare wealth redistribution to public good provision. We find that subsidizing public good provision increases giving, while subsidizing wealth redistribution does not. Furthermore, subsidies do not undermine giving or norms about giving in the long-term.

Keywords: External Transfers, Subsidies, Wealth Distribution, Public Good Provision, Giving Behavior, Social Norms, Dictator Game

JEL Classification: C91, D64, H40, O10