Public fiscal behaviour & aid heterogeneity in aid-recipient economies

The paper develops a model of public fiscal behaviour of the aid-recipient government in the presence of both endogenous and heterogeneous foreign aid. We endogenize aid on the grounds that the recipient government has some influence over aid disbursements. Regarding aid heterogeneity, it is argued that each of the main four categories of aid, namely project aid, programme aid, technical assistance and food aid may exert different effects on the recipient economy. Furthermore, in case the preferences of the aid-recipient government are higher for some of these types of aid, neglecting aid heterogeneity would lead to aggregation bias in the results and conclusions. The model adds an important new dimension to the vast aid effectiveness literature and calls for further modelling as well as empirical work in this promising research area so that significant policy implications can be derived.