Kiel Working Papers, Kiel Institute for World Economics
No 1630:
Does Conditionality Work? A Test for an Innovative US Aid Scheme
Hannes Öhler, Peter Nunnenkamp and Axel Dreher
Abstract: Performance-based aid has been proposed as an alternative
to the failed traditional approach whereby donors make aid conditional on
the reform promises of recipient countries. However, hardly any empirical
evidence exists on whether ex post rewards are effective in inducing
reforms. We attempt to fill this gap by investigating whether the
Millennium Challenge Corporation (MCC) was successful in promoting better
control of corruption. We employ a difference-in-difference-in-differences
(DDD) approach, considering different ways of defining the treatment group
as well as different time periods during which incentive effects could have
materialized. We find evidence of strong anticipation effects immediately
after the announcement of the MCC, while increasing uncertainty about the
timing and amount of MCC aid appear to weaken the incentive to fight
corruption over time. We conclude that – if designed properly
–conditionality can work
Keywords: Foreign Aid, Corruption, Millennium Challenge Corporation, MCC Effect; (follow links to similar papers)
JEL-Codes: F35,; O17; (follow links to similar papers)
34 pages, June 2010
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