International Tax and Public Finance

, Volume 14, Issue 5, pp 525-541

First online:

Rent seeking and aid effectiveness

  • Roland HodlerAffiliated withDepartment of Economics, University of Bern Email author 

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We introduce foreign aid and a rent seeking contest for public funds into the Barro (JPE 1990) growth model. We find that aid effectiveness depends on fiscal policies, the level of aid inflows and the quality of institutions that restrict appropriation of public funds by rent seeking agents. These results can be shown to be consistent with the best established findings in the empirical literature on aid effectiveness. Rent seeking may thus indeed be a major determinant of aid effectiveness. We further discuss how aid effectiveness depends on the way foreign aid is disbursed and on the determinants of institutional quality.


Foreign aid Growth Rent seeking