Coordination Failure in Foreign Aid

Abstract We analyze allocation of foreign aid to different sectors in a recipient developing country. Donors tend to favor social sectors over other public expenditure programs. Due to incomplete information coordination failure occurs. The donors may concentrate too much on the priority sectors leaving the lower priority, yet important, sectors lacking of funds. Alternatively there may be gaps in services in the priority areas because of the information problem. We find that the more similar preferences the donors have, the more scope there is for coordination failure.