Intermediation by Aid Agencies

University of Birmingham Economics Working Paper No. 05-16

32 Pages Posted: 17 Nov 2004

See all articles by Colin Rowat

Colin Rowat

University of Birmingham - Department of Economics

Paul Seabright

University of Toulouse I - Industrial Economic Institute (IDEI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

Abstract

This paper models aid agencies as financial intermediaries that do not make a financial return to depositors, whose concern is to transfer resources to investor-beneficiaries. This leads to a problem of verifying that the agency is using donations as intended. One solution to this problem is for an agency to employ altruistic workers at below-market wages: altruistic workers, who can monitor the agency's activities, would not work at below-market rates unless it were genuinely transferring resources to beneficiaries. We consider conditions for this solution to be incentive compatible. In a model with pure moral hazard, observability of wages makes incorporation as a not-for-profit firm redundant as a commitment device. In a model with both moral hazard and adverse selection, incorporation as a not-for-profit firm can serve as a costly commitment mechanism reassuring donors against misuse of their funds. Hiring a worker of low ability can also be a valuable commitment device against fraud.

Keywords: Signalling, non-profit, wage differential, donations, altruism, two-sided market

JEL Classification: D21, D64, J31, L31

Suggested Citation

Rowat, Colin and Seabright, Paul, Intermediation by Aid Agencies (October 2005). University of Birmingham Economics Working Paper No. 05-16. Available at SSRN: https://ssrn.com/abstract=619741 or http://dx.doi.org/10.2139/ssrn.619741

Colin Rowat (Contact Author)

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom
+44 121 414 3754 (Phone)
+44 121 414 7377 (Fax)

Paul Seabright

University of Toulouse I - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 61 12 86 17 (Phone)
+33 5 61 12 86 37 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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