Official Development Assistance (ODA) represents the major flow of resources from rich to poor countries. In 2005, $107 billion of ODA were disbursed by the Development Assistance Committee (DAC) to less developed countries. Of these, $56 billion were provided by EU members. According to the literature, despite substantial amounts of aid that low income countries have received in the past decades, the expectation that aid boosts investment and growth in recipients has not been met. The limited effectiveness of aid to reach the intended objectives has encouraged greater attention on whether current practices in aid implementation and allocation processes are appropriate, given imperfections that characterize markets in poor countries. More recent academic theory, primarily developed in European academia, has shown that donors are not able to design appropriate aid contracts: recipients do not perceive sufficient incentives to make aid effective. The aim of this research is twofold: first, theoretically, to design “incentive compatible” contracts between donors and recipients and explore in detail whether the screening process undertaken by donors can be improved. Second, given the poor quality of data for developing countries, the objective will be to test the assumptions and evaluate the policy implications of the theoretical model, by means of appropriate economic experiments. The Marie Curie fellowship will offer a unique opportunity to reach the above objectives, by allowing Dr. Isopi, whose research activity has focused primarily on contract theory applications to foreign aid, to spend time at the Nottingham School of Economics and benefit from the research expertise in two of the most highly regarded Development and Experimental Economics research centres in Europe. The analyses and policy implications from the research will be relevant for the European Community, given the considerable role played EU members in the international cooperation environment.
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