Should easier access to international credit replace foreign aid?

We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.Foreign aid program

The fiscal impact of foreign aid in Rwanda : a theoretical and empirical analysis

The inflow of large quantities of foreign aid into Rwanda since 1994 can have potential adverse effects such as aid dependency via a significant negative effect on tax efforts and on public investments. This paper carries out a theoretical and empirical study to examine these issues. The theoretical part develops a model in which the recipient government decides on the optimal level of tax and optimally allocates total government revenue between current expenditure and public investment. The theoretical model makes it possible to empirically test whether an increase in aid is likely to reduce the optimal tax rate and the proportion of public expenditure allocated to public investment. The econometric analysis uses time series data on Rwanda to show, in line with other studies in the literature, a negative relationship between increased aid and the tax rate; but the magnitude of the effects are extremely small. In the case of Rwanda, reforms to the tax administration and expansion of the tax base have had mitigating effects. As far as the effect on public investment, the overall effect was negative in the past; however, since 1995 the direction of this effect has changed.Debt Markets,Economic Theory&Research,Public Sector Economics&Finance,,Access to Finance

Gender Bias in Education: the Role of Inter-household Externality, Dowry and Other Social Institutions

We analyze gender bias in school enrollment by developing a two-period model where women become part of extended families of their in-laws. Each family decides how many children are sent to school and thus become skilled. Gender bias occurs due to failure of the families to internalize inter-household externalities. ‘Groom-price’ dowry worsens the situation. Under ‘bride-price’ dowry, bias exists if and only if the skill premium in the labor market is bigger than that in the marriage market. A specific discriminatory ‘food-for-education’ policy is shown to reduce bias, but increase total enrollment. Finally, using cross-country data, we test some of the predictions of our theoretical analysis

Bilateral War in a Multilateral World: Carrots and Sticks for Conflict Resolution

This paper constructs a three-country, many-good and many-factor trade-theoretic model in which two of the countries are in conflict and where war effort is determined endogenously in a Nash equilibrium. The third country does not take part in the war, but trades with the warring countries. In the framework, we examine, inter alia, how war and welfare are affected by globalization and by two instruments available to the third country — one carrot and one stick. Our overall conclusion is that the third parties do have the incentives for, and can play an effective role in, conflict resolution

Matching Public Support for Private Product-Innovating R&D: A Theoretical Analysis

This paper develops a theoretical model of product innovation where research and development (R&D) effort by a monopolist firm is endogenous and its outcome uncertain. The government attempts to aid such efforts with a matching grant. We consider different scenarios depending on whether two parties act simultaneously, act sequentially, or take part in a dynamic cooperative game with a trigger strategy. We also consider cases (i) when the products are exported, (ii) when the firm lobbies for R&D subsidy, and (iii) when the firm is foreign owned. We characterize situations when government intervention increases the chances of product innovation and when it does not

Foreign Aid as Prize: Incentives for a Pro-Poor Policy

We develop a theoretical model of foreign aid to analyze a method of disbursement of aid which induces the recipient government to follow a more pro-poor policy than it otherwise would do. In our two-period model, aid is given in the second period and the volume of it depends on the level of wellbeing of the target group in the first period. We find that this way of designing aid does increase the welfare of the poor. We also consider the situations where the donor and the recipient governments act simultaneously as well as sequentially, and find that by moving first in a sequential game, the donor country can, under certain conditions, increase the welfare of the poor and its own compared to the case of simultaneous moves