Aid Tying and Donor Fragmentation
This study tests two opposing hypotheses about the impact of aid fragmentation on the practice of aid tying. In one, when a small number of donors dominate the aid market in a country, they may exploit their monopoly power by tying more aid to purc...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120105100233 http://hdl.handle.net/10986/3219 |
| Summary: | This study tests two opposing hypotheses
about the impact of aid fragmentation on the practice of aid
tying. In one, when a small number of donors dominate the
aid market in a country, they may exploit their monopoly
power by tying more aid to purchases from contractors based
in their own countries. Alternatively, when donors have a
larger share of the aid market, they may have stronger
incentives to maximize the development impact of their aid
by tying less of it. Empirical tests strongly and
consistently support the latter hypothesis. The key finding
-- that higher donor aid shares are associated with less aid
tying -- is robust to recipient controls, donor fixed
effects and instrumental variables estimation. When
recipient countries are grouped by their scores on
corruption perception indexes, higher shares of aid are
significantly related to lower aid tying only in the
less-corrupt sub-sample. This finding is consistent with the
argument that aid tying can be an efficient response by
donors when losses from corruption may rival or exceed
losses from tying aid. When aid tying is more costly, as
proxied by donor country size and income, it is less
prevalent. Aid tying is lower in the Least Developed
Countries, consistent with the OECD Development Assistance
Committee's recommendation to its members. |
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