DP4781 Intermediation by Aid Agencies

Author(s):	Colin Rowat, Paul Seabright
Publication Date:	December 2004
Keyword(s):	altruism, donations, non-profit, signalling, two-sided market, wage differential
JEL(s):	D21, D64, J31, L31
Programme Areas:	Public Economics, Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=4781

This Paper models aid agencies as financial intermediaries that do not make a financial return to depositors, since the depositors' concern is to transfer resources to investor-beneficiaries. This leads to a significant problem of verification of the agencies' activities. One solution to this problem is for an agency to employ altruistic workers at below-market wages: workers can monitor the agency's activity more closely than donors, and altruistic workers would not work at below-market rates unless the agency were genuinely transferring resources to beneficiaries. We consider conditions for this solution to be incentive compatible.