Looking Ahead Optimally in Allocating Aid

Summary The Collier-Dollar approach to aid allocation among countries has been less than fully embraced by donors--even those focused on poverty reduction--partly because it conflicts with the approach to aid allocation implied by the Millennium Development Goals. These two approaches are shown to be special cases of a more general model of aid allocation, in which donors care about future as well as current poverty. This model is illustratively applied to data for developing regions. Adding a poverty decline adjustment to the allocation formulae used by donors could resolve the conflict between the two approaches.

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