Contracting for aid

Foreign aid is analyzed as a contract where the North gives a transfer to the South in return for poverty reduction, regarded as an international public good. The issue of conditionality is first discussed in a moral hazard framework, and then under asymmetric information about the degree of altruism of the government of the South. Additional actors like local NGOs and multilateral aid institutions are then added to the model. The optimal contracts to avoid free-riding or collusion are then presented. (C) 2002 Elsevier Science B.V All rights reserved.