ABSTRACT This paper provides a political economy theory of multilateral aid allocation. We argue that the allocation of multilateral aid depends on the heterogeneity of its member states' interests as well as on the formation of interest coalitions which can overcome the collective action problems inherent in intergovernmental bodies. Whereas member states delegate aid to multilateral institutions in order to signal neutrality of aid allocation to their domestic populations, states have an incentive to covertly bias the multilateral allocation process towards their strategic interests. When member states' preferences over aid allocation are heterogeneous, the multilateral aid agent can implement multilateral aid according to its organizational goals. However, greater homogeneity of members' goals increases the likelihood that members can form powerful interest coalitions and successfully loosen the grip of their ties, and induce the multilateral aid agency to allocate aid according to their strategic interests. We apply our general theory to multilateral aid allocation in the European Union, the most dominant multilateral aid donor in the world over the last decade. The empirical analysis provides robust support for our theoretical argument
