1. IntroductionEmpirical evidence indicates that poor countries frequently abstain from implementing the conditions that donors have set as a requirement for granting foreign aid. Still, it is found that the aid is disbursed irrespective of the recipient's implementation record (World Bank 1992; Mosley, Harrigan, and Toye 1995; Collier 1997; Svensson 2000a). The World Bank (1992) concluded that even though the rate of compliance with World Bank conditions was only 50%, the release rate of loans was nearly 100%. In other words, despite the donors' intention to induce the recipients to undertake what are perceived by the donors to be good policies, usually regarding fiscal, monetary, and trade policies designed to increase economic growth, it is found that aid does not induce these policies (Burnside and Dollar 2000).1 Even more uncontroversial conditions, like setting a certain minimum level of expenditure on health care and education, seem to fail (World Bank 1992; Mosley, Harrigan, and Toye 1995; Oxfam 1995).The malfunctioning of conditionality is a serious problem for the donor community and the multilaterals because this instrument is viewed as a necessity for achieving the goals of aid (Kanbur 2000). At the same time, receiving aid is a very important income source for poor countries. On average, aid accounted for more than half of central government expenditure for 50 of the most aid-dependent countries from 1975 to 1995 (World Bank 1998b), and a typical low-income country now receives around 7% to 8 % of GNP in foreign aid (World Bank 1998a). This gives rise to a puzzle: If it is vital for the recipients to get aid, and also essential for the donor to have the conditions implemented, why cannot the seemingly powerful donors force the seemingly weak recipients to implement the conditions before aid is disbursed?Ravi Kanbur's (2000) observations as a World Bank representative in Ghana in 1992 illustrate one potential explanation for the failure of conditionality. At that time, the Ghanaian government had refused to implement the conditions set by the World Bank for granting a loan, and the bank had to decide whether or not to disburse this loan. In this situation, private companies that had contracts with the Ghanaian government put pressure on the World Bank to release the loan because they were afraid of not getting paid. Eventually, the loan was disbursed without the implementation of the conditions, and Kanbur concludes that the pressure surrounding conditionality is important in explaining its failure. Thus, strategic recipients may refuse to implement the conditions and then threaten to cancel contracts with companies in order to put pressure on the donor to disburse aid.2Building upon the triadic3 modeling structure of Basu (1986), we consider the interdependence that sometimes arises between donors, recipients, and large companies with interests in both countries.4 In this model, the donor takes into account both its own and the company's relationship with the recipient when deciding on aid disbursement, and, more generally, each of the agents always takes account of the triadic structure when making their decisions. If the recipient can influence the company to put pressure on the donor to disburse the aid, we show that this could make the donor provide the aid even when the recipient has not implemented the conditions. We show that the recipient is not able to influence the company in a situation where the parties interact only once. However, donors usually give aid to the same recipients over time, and allowing for repeated interactions between the parties gives the result that the recipient is able to influence the company to generate pressure against conditionality. Hence, the recipient is not necessarily as weak as it may seem, because the recipient might be able to use the company's influence over the donor.This article is related to the literature on foreign aid in general and to the work on the failure of aid conditionality in particular. …