1. Why Donor Countries Give Aid?
SNU GSIS
Why Donor Countries Give Aid?
International Development Cooperation: Theory & Practice

2. Objective of Aid
Official Development Assistance (ODA): Flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character…
Is this rational from the viewpoint of utility maximization?
What is their attempt?

3. Rational Behavior It is not rational.
From the viewpoint of utility maximization, aid increases the utility of the donor in two ways:
Utility from altruism
Political/economic benefits that the donor country can obtain because of the provision of aid

4. Utility Function (Altruism Model)
The utility function (U) of donor country is:
𝑈=𝑈(𝑥, 𝑉 𝑎 )
𝑥+𝑎=𝑦
V : welfare (increase) of recipient country
x : consumption of donor country
y : income of donor country
a : aid provided by donor country to recipient country

5. Δ𝑈 Δ𝑥 = Δ𝑈 Δ𝑉 ΔV Δ𝑎 Utility Maximization
$1 of consumption must give the same marginal utility as $1 of aid
Which recipient country has a larger Δ𝑈 Δ𝑉 or ΔV Δ𝑎 ?

6. (Altruism + National Interest) Model
Utility from altruism and political/economic benefits
𝑈=𝑈(𝑥, 𝑣, 𝑤)
𝑥+𝑎=𝑦
𝐹 𝑣, 𝑤,𝑎 =0
v: welfare of recipient country
w: political/economic benefits
F: joint production function: a produces v and w

7. Joint production: altruism and national interestw B
F( v, w; a’ )=0
F( v, w; a )=0 A v

8. Rational Choice w
F( v, w; a )=0 U v

9. Income expansion path w U
F( v, w; a )=0 v

10. Different preferencesw U1
F( v, w; a )=0 U2 v

11. Global Public Goods non-rivalrous non-excludable
available more-or-less worldwide
climate change mitigation
financial stability
Security
knowledge production
global public health
Poverty reduction?