Is Foreign Aid Motivated by Altruism or Self-Interest? A Theoretical Model and Empirical Test

Abstract

Why do some countries give foreign aid to poorer countries and what is its effect on recipient growth? Many decades of research has not provided definitive answers to either of these questions. One obstacle to answering these linked questions is that unobserved donor motivation may create an endogeneity bias that complicates measurement of aid effectiveness. We develop a theoretical model that generates a signal of altruistic donor motivation and find it present in approximately one-fifth of a large set of donor-recipient pairs. We explore the external validity of our signal in the standard growth regressions and find evidence that aid from donors' displaying our altruistic signal yields distinguishable and higher benefits for the recipients. Our model generates a new method to disentangle altruistic and self-interest motivations in foreign-aid donations, and may be applicable to broad classes of voluntary transfers.