We develop a political-economic model of foreign aid allocation. Each ethnic group in the donor country lobbies the government for allocating more aid to its country of origin, and the government accepts contributions from lobby groups. Initial per-capita income of the recipients and those of...

We develop a political-economic model of aid fungibility: a part of aid is diverted away from its intended target by lobby groups. The size of this diversion - the degree of aid fungibility - is determined endogenously by the recipient government. The donor can affect the equilibrium degree of...

Why do donor countries give foreign aid? The answers found in the literature are: (i) because donor countries care for recipient countries (e.g. altruism), and/or (ii) because there exist distortions that make the indirect gains from foreign aid (e.g. terms of trade effects) to be larger than...