The effects of aid agency independence on bilateral aid allocation decisions

Abstract

We investigate whether differences in the formal independence of donor countries' aid agencies affect bilateral aid allocation decisions. Specifically, we examine whether allocation decisions made by donor countries with merged aid agencies are more heavily influenced by foreign policy and commercial trade concerns, and less influenced by developmental concerns. We exploit variation in the independence of DAC member countries’ aid agencies across time and space to identify this effect in a panel empirical model. Our econometric methodology borrows from developments in the empirical trade literature to accommodate a dataset with numerous zero-value observations. Our results indicate that aid agency independence does not have significant effects on the determinants of bilateral aid flows at the extensive or intensive margins. Donor countries with merged aid agencies do not place more emphasis on foreign policy and trade concerns, and donor countries with independent aid agencies do not place more emphasis on recipient-country poverty.