The Impact of Performance Intensive Policy Intervention: Aid Policy that is Performance Intensive

We examine a two country aid model with performance intensive aid. The aid budget is determined by a donor country legislature, but allocated by a donor agency in terms of a performance criterion of its choice. Five sources of slippage in policy delivery are introduced: the donor agency observes the performance of the aid recipient imperfectly; the donor agency and the aid recipient are subject to inefficiency; the aid recipient experiences corruption; and adjustment of aid recipient performance is costly. Incentives between the aid donor and the aid recipient are intentionally aligned – to explore the best-case for the policy intervention. Immediate implications are then that optimal level of effort and governance in the aid recipient increase under performance intensity of aid. Moreover, performance intensity of aid has fundraising effects. While the aid recipient also has an incentive to increase the measurement noise in governance, this incentive is weaker than that to raise true underlying governance, is weakest for the poorest aid recipients and provided that the donor agency is sufficiently efficient, measurement error itself will serve to raise optimal effort in the aid recipient. The importance of aid agency self-monitoring is thereby identified. Three important qualifications on the anticipated success of the policy emerge, however. Despite the elimination of incentive misalignment, aid donors may come to rely on performance intensity precisely where such a reliance is likely to be least successful in aid recipients. Second, performance intensity of aid maximizes its impact under conditions where it is supplemented by technical assistance to improve the effectiveness of own effort by the aid recipient. Finally, under convex adjustment costs the general class of optimal time paths in governance in aid recipients will be non-monotone, such that governance may get worse before they get better – optimally so. Performance intensive policy may thus appear to fail – immediately after imposition.

Working Paper 017
1 December 2005
19 September 2012
Publication Type: Working Paper

Related South Africa’s Cities and Growth Spatial Challenges and Policy Interventions Content

Request for Proposals: The role of cities as drivers of growth and employment
Background Urbanization in South Africa is expected to reach 80% by...
Call for Work
South Africa’s future will be decided in our cities
Discussion Document 14 South Africa’s cities face multiple, overlap...
Dieter von Fintel, Justin Visagie, Ivan Turok, Takwanisa Machemedze, Claus Rabe, Sebastian Galiani, Edward Glaeser
Discussion Document
Monitoring South Africa’s metropolitan economies: A survey of the data landscape
Discussion Document 13 Disparities in data across different metropo...
Dieter von Fintel
Discussion Document
Cities, productivity and Jobs in SA: Problems and potential
Discussion Document 12 Cities contribute to national prosperity bec...
Ivan Turok, Justin Visagie
Discussion Document
Place-based economic policies: international lessons for South Africa
Discussion Document 11 Place-based policies are designed to support...
Harris Selod, Claus Rabe
Discussion Document
What luminosity data can and cannot reveal about South Africa’s urban economies
Discussion Document 10 As novel types of data are becoming availabl...
Takwanisa Machemedze
Discussion Document
Crime: A policy-oriented survey
Discussion Document 9 South Africa has a reputation for having high...
Sebastian Galiani
Discussion Document
Virtual CDE Workshop on SA Cities and Growth
Urban economics has provided powerful insights into how the charact...

Search Resources

Ground Floor Brookside Building
11 Imam Haron Road
Claremont, 7700
Cape Town

PostNet Suite # 109
Private Bag X1005
Claremont 7735
Cape Town

Get Social