Budget Support Versus Project Aid: A Theoretical Appraisal

Should donors interested in the effectiveness of developmental programmes rely on conditional budget support or on project aid? To answer this question, we present a model in which only a subset of developmental expenditures can be subject to conditionality. We show that budget support is preferable to project aid when the preferences of donors and recipients are aligned, and when assistance is small relative to the recipients' own resources. Furthermore, when donors cannot observe the recipient's type, they may impose higher levels of conditionality to separate committed governments from uncommitted ones. Copyright International Monetary Fund. Journal compilation Royal Economic Society 2007.