Aid effectiveness and imperfect monitoring: EU development aid as Prisoner’s Dilemma

Abstract

This paper analyzes the effectiveness of EU development aid to the economies of the former Soviet Union under conditions of imperfect monitoring. Transnational sovereignty partnerships (TSPs) suggest a novel type of aid recipient and an institutional component of the TACIS program. TSPs are composed of distributive planners and developmental entrepreneurs. Distributive planners set the development strategy and developmental entrepreneurs implement it based on EU development aid. I model the delivery of EU development aid to the former Soviet Union as an infinitely repeated Prisoner’s Dilemma with private signals. Aid effectiveness occurs when the European Commission signals that it will finance another TSP, without reducing its expected profit from aid implementation.