International donor agencies’ incentive structures and foreign aid effectiveness

Abstract

This paper examines in depth one of the potential causes of the low performance of foreign aid; in particular, the role incentive structures within international donor agencies could play in leading to ‘a push’ to disburse money. This pressure to disburse money is termed as the ‘Money-Moving Syndrome’ (MMS). The theoretical analysis in this paper relies on the principal–agent theory to explore how donor agencies’ institutional incentive systems may affect the characteristics of an optimal and efficient incentive contract and thus give rise to the MMS. The basic framework of the principal–agent theory was innovatively adapted to fit the organizational settings of donor agencies. The model concludes that the extent to which a performance measure based on the amount of aid allocated within a specific period of time would lead to the MMS and affect aid effectiveness depends on the level of ‘institutional imperatives’, the degree of aid agency’s accountability for effectiveness, the level of corruption in recipient countries and the degree of difficulty to evaluate development activities.