The political economy of foreign aid

This dissertation studies the relationship between foreign aid and civil war in developing countries, as well as collective action problems and coordination among donors in the provision of foreign aid. Chapter 1 presents a formal model that investigates a donor's decision how much bilateral aid to provide to a recipient government that is engaged in rent extraction, but needs to worry about popular opposition. The theoretical analysis demonstrates under which circumstances recipient governments are able to exploit donor preferences for political stability to extract higher rents, and how this increases the risk of political unrest. The statistical analysis produces evidence that higher levels of committed aid decrease the probability of civil war onset, while aid shortfalls increase the risk of conflict. Chapter 2 investigates under which conditions foreign aid is under-provided because of free-riding between donors. I develop a unified game-theoretic and statistical model that treats aid as going towards an impure public good. The statistical analysis provides evidence that donors are more likely to free-ride on each others' contributions if recipient countries have lower budget deficits and better political institutions. The third chapter explores patterns of stable and long-lasting relationships between individual donors and recipient countries. I develop a theory that attributes lead donorship to strategic interactions between donors, as well as a new conceptual measure of lead donorship. The statistical analysis provides evidence that strategic interactions play an important role in giving rise to lead donorship.