On foreign aid effectiveness: when conditionality met ownership

Abstract

In this paper, we propose a game theoretic approach to deal with the problem of implementing the efficient allocation of aid and reform through policy conditionality. We show that optimality can only be attained by a conditional scheme that takes into account the characteristics of both donor and recipient. Moreover, the levels of aid and reform induced by such a mechanism are, under certain conditions, compatible with the goals of the recipient government. This result reconciles ownership with a specific form of conditionality.