Altruistic Donors, Development and Redistribution

Which projects should a donor help develop? Should they ask the recipient country to co-finance the infrastructure project or should they give a discretionary budget in addition to the investment in infrastructure?

In this seminar Dr Mohamed  Sraieb considers a model with a risk-averse donor and recipients, where infrastructure can be targeted to the poor or to the rich, and where monetary transfers affect the allocation to the rich and the poor in the country.

He goes on to show that both under perfect and imperfect information, an altruistic donor will want to use aid contracts that contain both discretionary budget and infrastructure projects; rich countries may be asked to co-finance projects.

Under imperfect information, pooling contracts are often optimal, and may provide the donor a higher expected payoff than the expectation of the full information equilibrium allocation, illustrating the insurance motive provided by pooling contracts and the fact that asymmetry of information serves as a commitment device for the donor to offer this smoothing of transfer and infrastructure.

Finally, Mohamed shows that both under perfect and imperfect information, a donor faces a Samaritan dilemma only when institutional improvements affect principally the income of the country but not the redistribution motive of elites.