Absorption Capacity and Disbursement Constraints

Abstract

Why do donors and recipients act the way they do? In this paper I provide some partial answers by discussing some of the most important incentive constraints facing donors and recipients. Some of these incentive constraints, like multiple objectives, difficulties in measuring output or outcomes, and weak performance incentives, are problems most public agencies face, although they are often more pronounced in donor agencies. More important, there are features that are unique to the foreign aid sector, including multiple agents (donors) and a weak or broken information/accountability feedback loop between beneficiaries (in the recipient country) and voters and politicians (in the donor country). The donor agencies’ incentives also influence the recipients’ behavior, and their ability to use aid productively. This paper will discuss the incentive problems in disbursing and absorbing aid and how they interact in determining the efficiency of foreign aid. In so doing, it will mostly highlight problems, but to some extent also discuss ways forward.

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