The Effect of Bargaining on US Economic Aid

Abstract

This article is designed to explore the effect of bargaining power on the distribution of US economic aid. Conceptualizing US foreign assistance as the outcome of aid-for-policy transactions between the donor and its recipients, it shows why the bargaining issue is an integral part of US economic aid. A two-tiered stochastic frontier analysis (SFA) is then developed to integrate the bargaining effect into our empirical analysis. Applying the model to US economic aid for the period of 1976–2011, I show empirical results that strongly support the bargaining approach. The results show that the bargaining effect explains a fundamental part of the cross-recipient difference in the level of US economic aid. On average, the donor US enjoys more bargaining power. However, a huge variation in bargaining capability on the recipient side is equally noteworthy. As for the contributors to the difference, the statistical results reveal that bargaining efficiency increases with higher per capita income, ongoing civil war, violations of personal integrity rights, and a more democratic regime, on the one hand. Importing heavily from and having an active defense pact with the US, on the other hand, affect bargaining efficiency negatively.

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