Competition for environmental aid and aid fungibility

Abstract

Aid from environmentally conscious donors to developing recipients has long been thought of as a very promising way of preserving the global environment. However, aid is fungible and recipients cannot commit to using it for the purpose it was intended. We analyze competition for aid games with aid fungibility and cross-border pollution to gain insights on how to allocate environmental aid more efficiently. We set up a two stage game of two recipients receiving aid from a donor interested in minimizing pollution. Recipients cannot commit on the use of aid but they can commit on the infrastructure necessary to use aid for pollution abatement. We find that the success of competition for aid games depends critically on the degree of cross-border pollution. This determines whether it is more efficient to set up such games between recipients with little (or a lot of) cross-border pollution between them. © 2012 Elsevier Inc.