| In Chapter 1 we present a foreign aid contract for a project that has N stages to be completed sequentially. We find that the optimal aid contract provides decreasing transfers and promises for successive unsuccessful attempts in a given stage, but greater transfers and promises when the subsequent stages are reached. We find that the optimal sequence of transfers is greater the bigger is the exogenous probability of returning to a preceding stage and the greater the principal's cost of stage verification is. This model is able to fit a wide range of projects: from projects where the probabilities of unpredictable shocks that can make the project go back to preceding stages are negligible, like infrastructure building, to projects where these exogenous factors play an important role, like health programs.;In Chapter 2 we design a Foreign Aid multiple project contract that provides optimal incentives to recipients, in a world where externalities exist among the multiple projects and where donors and recipients may differ in their valuation of the projects. We study the optimal incentive payments in a dynamic principal-agent framework. We focus on two-project contracts. The donor (principal) cannot observe the recipient's (agent) investment, but only completed projects. Since real world donors cannot commit to the termination of a contract before the completion of the projects, we assume that the contract does not end until both projects are accomplished. We find that projects should be undertaken simultaneously when value externalities among them are large, i.e. when completing both projects gives the recipient significantly more utility than the sum of the projects' independent values. The donor's utility maximizing strategy when technical externalities among projects are important is a sequential contract that starts with the project that generates the externality. We also find that differences in projects valuation between donor and recipient may lead to inefficiencies in the use of the funds.;In Chapter 3 we evaluate the differential effect of tied and untied aid contracts on growth, and how this effect varies with the policy environment of the recipient country. We use the databases of Burnside and Dollar (2000) and Easterly, Levine and Roodman (2003) for the period 1970--1997. We find that the effectiveness of aid is not significantly different for the two types of aid. But when we condition on policies, we find that untied aid has a greater impact than tied aid. We find that this difference is significant for the sample of low and middle income countries, and is not statistically significant but consistent in sign for the sub sample of low income countries. |
