ESSAYS ON FOREIGN AID EFFECTIVENESS: THE ROLE OF MONITORING PROCEDURES IN IMPROVING AID EFFECTIVENESS AND THE IMPACT OF AID-RECIPIENT GOVERNANCE ON AID ALLOCATION AND WELFARE IN DEVELOPING COUNTRIES

This dissertation presents three essays on foreign aid effectiveness. Chapter 1 presents the role of monitoring procedures in improving the effectiveness of foreign aid. It analyzes how monitoring procedures influence the government’s effort and improve the effectiveness of foreign aid. The chapter considers two cases, the case in which the donor has unrestricted aid budget and the case where the donor has a fixed aid budget. The main concern in this chapter is determining the optimal contract for the donor that maximizes the effectiveness of the aid given her aid budget when she dealing with aid-recipients in the presence of moral hazard problem. The model analyzes the monitoring procedures between two players, donor and recipient in a one-shot game. It assumes that the decision to monitor and the choice of the recipient\u27s action are taken simultaneously. It suggests that with a fixed aid budget the donor is unlikely to invest heavily in monitoring cost and reward payment since the primary purpose of such aid is to help the poor in the recipient country. The reward payment which provides incentives for the recipient to work does indeed have a stronger effect on the likelihood of project success. It also shows that both the probability of monitoring and the optimal reward respond differently to change in monitoring cost. Chapter 2 studies the effect of aid-recipient governance on the allocation of foreign aid. It examines the hypothesis that better governance can reduce aid transaction cost which increases the assistance received by developing countries. The following questions were the main concern of this chapter, does better governance increase the amount of foreign aid delivered to developing countries? Do donors consider the levels of recipient’s governance when they allocate their funding? The chapter adopts annual data on a group of 67 developing countries covering Africa, and South Asia for the period from 2003 to 2014. It shows a positive relationship between two of our six governance indicators and the quantity of foreign aid. In fact, only control of corruption and voice and accountability have statistically significant effect on the amount of aid. It also shows that control variables have important effect in the determinate of foreign aid expect GDP per capita. Chapter 3 studies the impact of aid-recipient governance on aggregate welfare in developing countries. It investigates whether the effect of foreign aid on human development depends on the level of governance in recipient countries. These relationships are explored in an econometric analysis, 2SLS estimation, of panel data for the period from 2003 to 2014 in a sample of 67 developing countries. Our hypothesis is that better governance provides a better environment for foreign aid donor to achieve their goals. The main findings show that aid has a positive impact on human development only when it interacts with two out of the six indicators of governance: control of corruption and political stability. Aid by itself and military expenditures have a negative impact on the human development index