Bargaining matters: an analysis of bilateral aid to developing countries

Abstract

Conceptualising development assistance as the outcome of aid-for-policy transactions between donors and recipients brings the effect of bargaining power on aid allocation immediately to light. This study provides a two-tiered stochastic frontier analysis that is able to integrate the enquiry into bargaining power with the more traditional literature on aid determinants. By examining the bilateral aid commitment of 23 Development Assistance Committee members of the OECD during the period from 1992 to 2011, I find that donor countries have more bargaining power in surplus division than recipient countries. More specifically, donors have, on average, extracted policy concessions from recipients for about 14 per cent less than their baseline value. Rich variations in the distribution of bargaining power across countries and within individual aid determinants are also analysed and discussed.