Conditional Aid as a Risk-Sharing Agreement

• In Event: Information Technology and Politics; Formal Theory; and American Political Thought Virtual Poster Session
  In Virtual Poster Session: Formal Theory Virtual Poster Session

Abstract

Henry Kissinger once lamented that "I ask Rabin to make concessions, and he says he can't because Israel is weak. So I give him more arms, and he says he doesn't need to make concessions because Israel is strong." This ‘dilemma of influence’ mirrors the debate of two alternative schools of thought and their ostensibly contending claims about the most effective means of addressing noncompliance in international cooperation. On the one hand, the sanctions literature stresses enforcement and coercion; on the other hand, the foreign aid literature embraces a more problem-solving approach based on capacity-building. I challenge the conception of coercion and capacity-building as competing strategies for achieving compliance. Instead, I reconceptualise them as different (temporary) phases of one and the same (permanent) influence attempt. I model conditional aid as an imperfectly enforceable contract in an infinitely repeated agency model. The equilibrium path is characterised by intertemporal (state-dependent) exchanges of foreign aid and policy concessions that smooths the consumption of risk-averse parties given a stochastic endowment stream. The renegotiation-proof punishments consist of changes in the path of future payments. This framework also provides a new explanation of why aid flows can be procyclic.

Author

• Boris Brekhov, Freie Universität Berlin