LOST IN TRANSLATION An Examination of Foreign Aid Using Agency Theory

Open Access
Johnston, Andrew Tripp
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Bee Yan Roberts, Thesis Supervisor
  • David Shapiro, Honors Advisor
  • foreign aid
  • agency theory
In discussions on development economics and the ways in which to promote growth in countries that have fallen behind the curve, the merits of aid donated to those less well-off countries are carefully examined and measured to determine whether these transactions yield the intended results. In this paper, we begin by introducing some of the basic varieties of donations and services that fall under the umbrella of aid so as to provide a better understanding of the scope of topics discussed in this paper. Furthermore, an examination of the current arguments for and against foreign aid promoting growth in developing nations will shed light on the present environment of the aid discussion in development economics. Moving forward, the paper will shift its focus toward the core of its research. Foreign aid in developing nations will be analyzed through the lens of the principal-agent model more commonly used to examine standard labor contracts as well as the current market for insurance. This model will first be introduced based on its theoretical foundations to provide a sound basis for later practical applications. With this groundwork laid, the discussion will then shift toward how the donors and recipient nations of the foreign aid market fit within the parameters of this particular model, and how instances of market failure within the model can carry over into substantial inefficiencies in the pursuit of growth. More specifically, the practice of donor conditionality, or the tying of aid to certain benchmarks, will be examined as it results from principal-agent failures and leads to further inefficiencies in this particular market. Finally, a number of other remedies to the incentive-based problems in foreign aid will be examined and analyzed to determine their merit in improving the current aid landscape.