DP2482 Special Interest Politics and Aid Fungibility

Author(s): Sajal Lahiri, Pascalis Raimondos
Publication Date: June 2000
Keyword(s): Foreign Aid, Fungibility, Lobbying, Politics
JEL(s): F11, F35, O0
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2482

We develop a political-economic model of aid fungibility. A donor country gives aid to a recipient government for the benefit of a target group. However, the recipient government accepts political contributions from a lobby group not targeted by the donor and transfers a fraction of the aid to the non-target group. The size of this fraction is determined endogenously in the political equilibrium in the recipient country. We examine how the donor's behaviour affects the equilibrium, and how changes in the parameters of the model affect the total amount of aid and the proportion of it reaching the target group.