Should a Poverty-Averse Donor Always Reward Better Governance? A Paradox of Aid Allocation

Abstract

Abstract This article revisits the inter-country aid allocation by a donor who must distribute a given aid amount and is sensitive to needs and governance considerations. Against conventional wisdom, if the donor has strong enough aversion to poverty, the share of a country whose governance has improved is reduced. Yet, the poor will still be better off. These results continue to hold when aid effectiveness depends on intrinsic governance and the volume of aid received, and when a more general dynamic specification is considered. Finally, using our approach, the allocation rules in international organisations appear as clearly privileging governance over needs.