Samaritan's Dilemma, Time-Inconsistency and Foreign Aid: A Review of Theoretical Models

Aid by altruistic donors may induce recipients to reduce their own contribution to development efforts in order to elicit more aid from donors. Help by well-intentioned donors may reduce the welfare of needy. Donors may not be able to deter deviant recipients as any punishment involves reducing the welfare of recipients and thus the welfare of donors. This condition known as the Samaritan's Dilemma has played an important role in understanding the effects of foreign aid and the conduct and design of aid policies. The ineffectiveness of foreign aid and failure of aid-conditionalities to a significant extent can be traced to strategic interactions among donors and recipients. In this chapter, we review theoretical models which analyze the consequences of the Samaritan's Dilemma for foreign aid and its possible solutions. These models propose a number of solutions to this dilemma. The effectiveness of aid in spurring development process and reducing poverty can be enhanced by appropriately designing and implementing aid policies.