Foreign aid and fiscal behavior in a bounded rationality model : different policy regimes

We examine how the source of foreign aid affects the composition of the recipient government's spending. Does the source of aid - bilateral or miltilateral - influence ricipient policy-makers' choice between development and nondevelopment expenditure? We depart from previous literature by introducing strong asymmetries in policy-maker's preferences. With financial constraints set by foreign aid and domestic revenues, this formalization allows us to model and estimate the fiscal behavior of government policy-makers in the presense of foreign aid.