Samaritans, Rotten Kids and Policy Conditionality¤

Donors who try to impose policy conditionality on countries receiving their aid commonly face con‡icting incentives between using aid to induce income-increasing reforms and using aid to assist low-income countries: this con‡ict can lead to a time-consistency problem. This paper o¤ers a contractual analysis of conditionality, showing how conditionality contracts are a¤ected by con‡icting donor incentives in the presence of limited commitment power. Conditionality is shown to survive in an environment with weak donor commitment power, and it can eliminate the ine¢ciency associated with the no-conditionality outcome. However, even when conditionality is successfully imposed by donors, there may be an inverse relationship between aid and reform across di¤erent aid recipients. Multi-recipient and hidden-information extensions of the baseline model are also considered. JEL Classi...cation: D64; D82; F35; O19.