A Formal Analysis of Incentives in Strategic Interactions Involving an International Development Cooperation Agency

Abstract

Abstract Initial conditions in the recipient almost always reflect tragedies of the commons, public good problems, and principal-agent problems. Two broad motives/mechanisms behind the decision on the part of a developed country to enter a recipient country with aid are identified. The first is altruism and warm glow. The second is increased per capita GDP via growth factors including essential capital investment, overcoming market failure in the recipient countries. Using game theory, the strategic implications of this mix of initial conditions and donor motives on donor outcomes are studied. It is shown that aid dependency is a likely outcome of this mix.

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