Discussion Paper Details

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Title: Dynamic Aid Allocation

Author(s): Patrick Carter, Fabien Postel-Vinay and Jonathan Temple

Publication Date: August 2013

Keyword(s): Aid Allocation, Economic Growth and Foreign Aid

Programme Area(s): International Macroeconomics

Abstract: This paper introduces a framework for studying the optimal dynamic allocation of foreign aid among multiple recipients. We pose the problem as one of weighted global welfare maximization. A donor in the North chooses an optimal path for international transfers, anticipating that consumption and investment decisions will be made by optimizing households in the South, and accounting for limits in the extent to which recipients can effectively absorb aid. We present quantitative results on optimal aid policy by applying our approach to a neoclassical growth model, where the scope for aid-funded growth is determined by the recipients' distance from steady-state.

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Bibliographic Reference

Carter, P, Postel-Vinay, F and Temple, J. 2013. 'Dynamic Aid Allocation'. London, Centre for Economic Policy Research.