The paper builds on recent empirical evidence suggesting the importance of strategic donor behaviour for aid allocation to develop a theoretical model where the donor's pressure on a recipient to influence the aid disbursement of a multilateral institution is endogenously determined. Our game-theoretic, multi-agent model with two donors, one multilateral and one aid recipient illustrates the virtue of putting pressure on the recipient as an instrument for foreign policy as seen from the mighty donor's point of view. The model shows how this strategic donor behaviour is damaging for the aid-recipient; we also show that other donors that do not share the foreign policy goals of the strategic, influential donors will in fact reduce their aid contributions to the multilateral organizations. This may obviously have profound implications for the volume of total aid flows and may crucially undermine current efforts to increase substantially ODA to meet the Millennium Development Goals by 2015. Our paper also contributes to the common pool debate on foreign aid by presenting a rigorous model that explains the coexistence of multilateral aid organizations together with bilateral aid programmes.

Espen Villanger

Deputy Director, Research Director

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