Foreign Aid and the Theory of Alliances

Donor Motives for Foreign Aid

“…In equilibrium, foreign aid by each of the donor nations exceeds the level that would be obtained in the absence of such strategic competition. Empirical results of Dudley's (1979) article support the national public goods with interaction model, suggesting that the relevant group of OECD nations was engaged in some form of competition for influence. Lahiri and Raimondos-Møller (2000) provide a political economy framework in which different ethnic groups in a donor nation provide political contributions to the donor government to lobby for aid to the respective source nations of these ethnic groups.…”

“…Using OECD aid commitment data from 1970, Dudley and Montmarquette find broad empirical support for their findings that lower per capita income of the aid recipients tends to raise per capita aid by the donors, while the population of the recipient nation has a more ambiguous effect. Dudley (1979) considers the interactions between different donors in aid giving. He classifies interactions into two potential categories.…”

On the provision of official and private foreign aid

“…There are many differences between our approach and the approach of the above mentioned articles. Most importantly, neither Olson and Zeckhauser (1966) nor Dudley (1979) focuses on the interaction between the government and private agents as we do. Also, we consider different types of equilibria which play no role in the said articles.…”

“…13 Fourth, in part of the analysis, private and public aid are allowed to have differential effects on the recipient country. The literature has treated foreign aid as a public good (see, for example, Olson and Zeckhauser, 1966;Dudley, 1979). Olson and Zeckhauser (1966) proposed a theory of alliances to explain the allocation of defense expenditures among Western nations in NATO.…”

“…In particular their concern was to find reasons why small countries tend to be free riders in international organizations. Dudley (1979) extended this framework and applied it to multilateral foreign aid. There are many differences between our approach and the approach of the above mentioned articles.…”