DONOR PREFERENCES AND RECIPIENT FISCAL BEHAVIOR: A SIMULTANEOUS ANALYSIS OF FOREIGN AID

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Abstract
We theoretically develop and empirically estimate a preference model determining foreign aid donor behavior. Aid access and levels are separately determined by endogenous budgetary allocations, the international economic environment, the distribution of income between countries, basic human needs, the small country effect, and regional bias. We find fungibility of aid in recipient budgets is due to donor and recipient preferences. Despite the importance of other economic influences, we find a significant pro‐poor country bias in aid allocations, although little aggregate influence of basic human needs or regional bias. The small country effect is significant for two (of six) donors. (JEL F35, O19, H 77)