Income Thresholds and Aid Responses

Abstract

The aid allocation literature has devoted surprisingly little attention to strategic interaction among donors. This study investigates the effects of the World Bank's income threshold for IDA eligibility, and of actual IDA allocations, on the allocations of bilateral donors. Other donors might interpret the World Bank's policies and allocations across recipients as informative signals of where their own aid might be used most effectively. Alternatively, other donors might compensate for reduced IDA allocations by increasing their own aid, particularly where declines in IDA were triggered by crossing an arbitrary income threshold. We show in this paper that the former effect dominates the latter, but we also find some heterogeneity among donors. Using panel data with country fixed effects, we find that aid from the DAC bilateral donor countries - and total aid from all donors reporting to the DAC - is significantly reduced after countries cross the IDA income cutoff, controlling for other determinants of aid including various nonlinear functions of (continuous) per capita income. Allocations by other donors are not sensitive to actual IDA disbursements, only to the IDA income threshold. Because crossing the income cutoff for IDA eligibility significantly reduces aid levels from other donors as well as from the World Bank, government officials in recipient countries may have an incentive to manipulate their national accounts data to understate per capita income when it is near the IDA threshold. Accordingly, we test for bunching of observations just below the income threshold, and find no evidence to support data manipulation concerns.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 2 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.