Strategic Interaction and Donor Policy Determination
This paper examines some of the issues associated with the aid donor process arising from the theory of agency or principal–agent models and endogenous policy determination. Principals may be viewed as legislators and the agents as the aid agency executing the wishes of the principals. In addition to adverse selection and moral hazard, the paper considers intrinsic sources of motivation for agents and the trade-off between adverse selection and moral hazard. Principals might be better off by trading in their differing objectives. The paper also considers the formation of aid policy via median voter outcomes, lobbying with contributions, and also in the presence of altruism. Finally, problems associated with signalling commitment to optimal policies are considered.