Shortcuts and signals: An organizational analysis of foreign aid allocation, with case study evidence from Brazil

I suggest a new dimension to the aid allocation research by exploring the aid allocation process at the point where donor agents decide which recipient organizations will receive their money. By examining the micro-level decision-making structures of various donor agencies, I test how these structures affect foreign development assistance. This differs from the typical explanation that emphasizes national-level priorities of donors. Donor agents are at an informational disadvantage when searching for recipients, and cannot afford to invest the time and resources necessary to researching all potential recipients thoroughly before making funding decisions. They therefore seek shortcuts that will ease their information gathering.; If donor agents are seeking the "right type" of recipient agency, it is in the interest of recipients to signal to donors that they are of the proper type. I explore this signaling here, on both theoretical and empirical grounds, using aid allocation to NGOs in Brazil as a case study. Qualitative interview evidence shows that donors make their decisions based on evaluations of recipient organizations' organizational attributes, and that some recipients can afford to invest in sending signals regarding those attributes, while others cannot. This evidence motivates the development of a signaling model, which I use to formally derive conditions under which those signals are credible.; I then support the model's implications with evidence from both small sample non-parametric analyses and large sample survey analyses, which indicates that recipients exhibiting higher levels of accessibility, credibility, and professionalism are more likely to receive the most money. As organizations are rewarded for their ability to signal their professionalism and credibility, it becomes possible that in acquiring the capacity to convey these images, recipients are also improving their ability to implement aid effectively. On the other hand, it is also possible that these organizations are diverting resources to signaling that could be spent on implementing aid more effectively, and undermining the development initiative. Understanding the micro-level aid distribution process thus sheds light on the much-debated effectiveness of aid implementation.