Rationality of Aid Donors : A Disaggregated Study of Aid Allocation

Abstract: This paper is concerned with the allocation of foreign aid. It intends to investigate the factors influencing the decision of aid donors. What sets this study apart from previous articles on this subject is the use of a disaggregated approach. While previous studies have almost exclusively focused on the total aid flow, this paper divides the total flow into six sub-groups according to the type of aid (budgetary support or sector specific) and to which sector it is dedicated. Using this approach enables us to see if donors make different considerations for different types of aid. Since a rational donor is likely to put different weight on certain factors depending on where the aid funds is going, this approach might be more suitable when evaluating the behavior of donors. Data for 125 recipient countries during 1995-2009 is put in panel data form and regressions are run for each of the six sub-groups respectively. The main finding is that there are in fact differences, between sub-groups, in  terms of what factors that influence donors; for example it seems like budgetary support is given mainly to less (relatively) developed country compared to sector specific aid. Hence this paper shows that aid allocation could preferably be studied on a disaggregated level.