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Foreign aid and international public goods : incentives and strategic behavior

Pedersen, Karl Rolf
Working paper
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URI
http://hdl.handle.net/11250/162816
Date
2002-08
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  • Discussion papers (SAM) [640]
Abstract
This paper considers a stylized model where a donor and a recipient

government derive utility from a public good (for example consumption

among the poor or defense capacity in the recipient country), in

addition to a private good each (for example their own tax-payers’ consumption).

The main point is to discuss how the aggregate provision of

funds earmarked for the public good and the distribution of the costs

depend on the pattern of interaction between the two governments.

Both non-cooperative interaction patterns (leading to undersupply of

the public good) and cooperative patterns (leading to Pareto-efficient

outcomes) are discussed. Cooperation is unlikely unless it is backed

by institutions or credible sanctions. Among the non-cooperative interaction

patterns the Nash-Cournot type is the best, in the sense that

the supply of the public good is highest. If one of the governments

behave as a (passive) Stackelberg leader (and the other as a follower)

the supply is considerably lower. The distribution of the cost depends

on who the leader is but it may be very uneven. If the Stackelberg

leader government is active and behaves as a principal, making the

other an agent, undersupply is eliminated but the distribution of the costs become even more uneven.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2002:17

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