Aid allocation rules |
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Institution: | 1. Department of Economics, Deakin University, Burwood, Victoria, 3125 Australia;2. Alfred Deakin Research Institute, Deakin University, Burwood, Victoria, 3125 Australia |
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Abstract: | This paper studies an aid allocation rule used by major development agencies, and investigates optimal allocations when recipients are neoclassical economies undergoing transition dynamics. When recipients face aid absorption constraints, allocations that favor poorer recipients are not always optimal, contrary to what is assumed in assessments of donor performance. The most quantitatively significant factors that determine the optimal sensitivity to recipient characteristics are the generosity of the aid budget and the extent of absorption constraints. In neoclassical recipients, aid can only accelerate growth where there is already growth, so the optimal rule places little weight on growth and optimality is largely a matter of balancing recipient need against absorption constraints. |
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Keywords: | Foreign aid Allocation Neoclassical growth model Absorption constraints |
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