DP12277 Aid Effectiveness: Revisiting the Trade-off Between Needs and Governance
This paper aims at elucidating the issue of inter-country aid allocation by a single
donor when the latter is sensitive to both needs and governance considerations and
is moreover able to influence local governance through his own disciplining effort.
In a one-donor-two-recipient framework and in conformity with observations from
the real world, the poorer recipient country is assumed to be less well governed than
the richer one. Many rich insights are gained from the analysis. In particular, the
poorer and less well governed country is more likely to receive a higher share of aid
if governance is endogenized through external disciplining by the donor. And the
share of a country will always increase if it has succeeded in improving its internal
governance, or discipline, thanks to its own effort. This is true even in the case
where this effort leads to a fall of aggregate governance as a result of an overcompensating
reaction of the donor when setting the level of external discipline .
Finally, a decrease in the cost of external discipline will favor the poorer and less
well governed country but only provided that the inter-country governance gap is