Working Paper 137 - Does Aid Unpredictability Weaken Governance? New Evidence from Developing Countries

This paper revisitates the effects of aid on governance from a different prospect, by upholding that aid unpredictability can potentially increase corruption in recipient countries through increased incentives from political leaders that are risk averse and corrupt, to engage in rent-seeking activities. Empirical investigation with data from 67 developing countries over1984-2004 provides supportive evidence that higher aid unpredictability is associated with more corruption as measured by a synthetic index. Coherently with some studies, we also found that aid dependency is on average associated with less corruption. These findings are a supplementary advocacy for the need to have a better predictability of aid.