Asymmetric Information, Rent Extraction and Aid E¢ ciency

O¢ cial Development Aid ‡ows are volatile, non-predictable and, also, nontransparent. All these features give rise to asymmetric information about the amount of aid ‡ows received by developing countries. This article uses a political economy model of rent extraction to show how this asymmetry (i) encourages rent extraction by kleptocratic regimes, thus reducing aid e¢ ciency, and (ii) increases the negative impact of aid volatility. The empirical relevance of the model is con…rmed on a yearly panel data on developing countries. Using various speci…cations and econometric methods, I develop new yearly estimates of aid volatility and aid e¢ ciency. I show that introducing more information increases aid e¢ ciency, which is robust to the use of di¤erent proxys for information. I also show that the negative impact of aid volatility on aid e¢ ciency vanishes once one controls for information. These results, which con…rm preliminary evidence by micro studies on public servants incentives, shed a new light on the aid e¢ ciency debate. JEL: F35, P16, 010, D82.