Intermediation by aid agencies |
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Authors: | Colin Rowat Paul Seabright |
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Institution: | 1. Department of Economics, University of Birmingham, United Kingdom;2. Institut d''Economie Industrielle, Université des Sciences Sociales, France;3. CEPR, London, United Kingdom |
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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 they 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. |
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Keywords: | D210 D640 J310 L310 |
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