Taxing Fragmented Aid to Improve Aid Efficiency

37 Pages Posted: 8 Sep 2015

See all articles by Emmanuelle Auriol

Emmanuelle Auriol

University of Toulouse 1 - Toulouse School of Economics (TSE); University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE); CESifo (Center for Economic Studies and Ifo Institute)

Pepita Miquel-Florensa

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: September 2015

Abstract

We present a model with two donors-principals that provide funds to a unique recipient-agent. Each donor decides how to allocate his aid funds between a pooled and a donor specific unilateral project. The production function of development depends positively on the three inputs (pooled funds and each unilateral project). They are complement in the sense that the development good is only produced if a minimum of each of these inputs is provided. Both principals and the agent value the output produced with the principals' pooled and two unilateral funded projects. However the donors have a bias in favor of their own unilateral project, which leads them to over-invest in these projects compared to the investment in the pooled project. The contributions to unilateral projects are greater than the welfare maximizing levels. To correct this problem the agent establishes a tax on the implementation of unilateral projects, which acts as a protection measure against biased allocation by the principals. The optimal tax imposed by the recipient on unilateral projects varies depending on the total amount of aid provided by the donor and on the productivity of his unilateral project. We present empirical support on the donors' preferences for unilateral projects, and how allocations and fragmentation are affected by recipient's characteristics.

Keywords: Aid fragmentation, Development, incentives, multi-principal

JEL Classification: D82, D86, F35, O19

Suggested Citation

Auriol, Emmanuelle and Miquel-Florensa, Pepita, Taxing Fragmented Aid to Improve Aid Efficiency (September 2015). CEPR Discussion Paper No. DP10802, Available at SSRN: https://ssrn.com/abstract=2657158

Emmanuelle Auriol (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE) ( email )

21 Allee de Brienne
Toulouse, 31000
France
+33 5 61 12 85 89 (Phone)
+33 5 61 12 86 37 (Fax)

HOME PAGE: http://www.idei.asso.fr/English/ECv/CvChercheurs/E

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Pepita Miquel-Florensa

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

21 allée de Brienne
Toulouse, 31015
France

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