Foreign Aid and Fiscal Behavior in a Bounded Rationality Model : Different Policy Regimes

We examine how the source of foreign aid affects the composition of the recipient government's spending. Does the source of aid--bilateral or multilateral--influence recipient policy-makers' choice between development and nondevelopment expenditure? We depart from previous literature by introducing strong asymmetries in policy-makers' preferences. With the financial constraints set by foreign aid and domestic revenues, this formalization allows us to model and estimate the fiscal behavior of government policy-makers in the presence of foreign aid