Handbook on the Economics of Foreign Aid
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Handbook on the Economics of Foreign Aid

Edited by B. Mak Arvin and Byron Lew

It would be fair to say that foreign aid today is one of the most important factors in international relations and in the national economy of many countries – as well as one of the most researched fields in economics. Although much has been written on the subject of foreign aid, this book contributes by taking stock of knowledge in the field, with chapters summarizing long-standing debates as well as the latest advances. Several contributions provide new analytical insights or empirical evidence on different aspects of aid. As a whole, the book demonstrate how researchers have dealt with increasingly complex issues over time – both theoretical and empirical – on the allocation, impact, and efficacy of aid, with aid policies placed at the center of the discussion.
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Chapter 28: Making aid work: governance and decentralization

Gil S. Epstein and Ira N. Gang


The aid literature generally looks at recipient behavior or the political economy of donor actions (Lahiri and Raimondos-Moller, 2000, 2004; Epstein and Gang, 2009; Kilby, 2011; Nanivajo and Lahiri, 2011; Banks and Hulme, 2012; Brech and Potrafke, 2014). Our intention is to examine a small part of the internal workings of a development aid organization (DAO), studying how the government or board to which it answers can set up a reward system so that the behavior of the DAO is properly aligned with policy. Development aid organizations are peculiar and complex organizations. Neither Leviathan nor libertarian, they possess multi-layered and multi-dimensional bureaucracies whose parts have overlapping jurisdictions and are in constant competition with one another (Murrell, 2002; Seabright, 2002). These rivalries can be characterized as contests – while the different parts of the organization presumably face the same organizational goals, they struggle to increase their own rewards often at the expense of other parts. In DAOs multiple departments typically compete for support and rewards from a central administration, a board of directors, or a government. Departments work to try to find solutions to problems faced by different countries. Each department invests resources and effort hoping to win the ‘competition’, increasing its prestige, gaining greater resources, or simply surviving as a unit. A department may come into conflict with other departments because of the development of rivalrous plans, at least partly overlapping jurisdictions, and/or the necessity of laying claim to having the bigger impact.

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