CSAE Working Paper WPS 20 1703 Turning the paradigm of aid allocation on its head 1
How should aid be allocated among countries? Past research efforts to answer this question followed three steps: (1) the definition of an objective function; (2) the characterization of its functional form; and (3) the estimation of its parameters. Each step has been heavily criticized. While thought provoking, all attempts to refine the objective function and its functional form have increased complexity, overburdening the already too fragile parameterization step. We argue that a complete rethinking and reversal of this paradigm is needed. We start by examining what can be estimated with "sufficient" credibility. We then define five key properties or axioms which are justified in terms of fairness, proportionality, and encouragement domestic investments. Finally, we combine these elements into an allocation formula. The framework is applied to the allocation of development assistance for health. 1 We thank Tony Atkinson, Benoit Decerf, Richard Manning, and Brian Nolan, as well as participants during seminars at the Institute for New Economic Thinking (INET) and the Blavatnik School of Government (BSG) at the University of Oxford for useful discussions and comments. Department of Economics, Oxford University, Oxford, United Kingdom Institute for New Economic Thinking at the Oxford Martin School, Oxford University, Oxford, United Kingdom Corresponding author: Olivier Sterck, CSAE, Manor Road Building, Manor Road, OX1 3UQ, Oxford, United Kingdom; Email: olivier.sterck@economics.ox.ac.uk; Tel: +44 782 66 77 594