Dodging Adverse Selection: How Donor Type and Governance Condition Aid’s Effects on School Enrollment

We employ AidData to test the effects of primary-education aid on school enrollment. We argue that the problem of adverse selection complicates both the allocation and the effectiveness of aid. We hypothesize that bilateral donors ought to have greater freedom to condition aid on recipient governance quality than multilateral donors, which are often bound by institutional rules to provide aid more impartially. Compared to their multilateral counterparts, bilateral donors may have advantages in overcoming adverse selection, resulting in bilateral aid’s boosting enrollments to a greater degree. AidData’s extensive coverage of multilateral aid enables this analysis for up to 100 low- and low-middle-income countries from 1995 to 2008. Latent growth regression analysis suggests that, compared to multilateral donors, bilateral donors indeed condition their primary education aid on recipient control of corruption and that bilateral aid is significantly related to improved enrollments.