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Economics Research International
Volume 2011 (2011), Article ID 368131, 4 pages
http://dx.doi.org/10.1155/2011/368131
Research Article

An Assessment of the “Policy View” in Foreign Aid under Asymmetric Information

Department of Economics, Western Michigan University, Kalamazoo, MI 49008, USA

Received 15 August 2011; Accepted 25 September 2011

Academic Editor: Miguel Leon-Ledesma

Copyright © 2011 Eskander Alvi and Debasri Mukherjee. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

The policy view, which argues that foreign aid is effective only in a good policy environment, suggests that aid ought to be given to countries with good policies. This has generated a lot of interest and controversy. We argue that the key recommendation of the policy view runs contrary to other prescriptions, particularly those that arise under asymmetric information. Inefficiencies that derive from information problems often require that policy makers do not base the amount of foreign assistance on the recipient's policy effort. This suggests that donors should be cautious in applying the policy view. We also briefly discuss problems that are likely to emerge in estimating aid's productivity given policy in the light of potential information problems.