Ocial Versus Private Foreign Aid: The Role of Crowding Out, Free Riding, and Political Economy

Abstract

There exists ample evidence that the provision of official (governmental) aid relative to private aid to developing countries varies considerably between donor countries. A multihousehold model of official and private aid provision is put forward to explain the said differences. The latter are explained in terms of different political economy equilibria, differences in country size and donor/non-donor household composition, the distribution of income in the donor country as well as differences in the extent of the coordination of private aid provision. The interaction between the government and the two types of donor households is modelled first as a simultaneous game and then as a two stage game in which the government or a donor group has a first mover advantage.

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