Stephane Pallage

Official development assistance is a key source of external finance in many developing countries. A striking feature of these aid flows is their positive correlation with business cycles in recipient countries. This pattern is puzzling in that it reinforces recipients’ already strong and costly macroeconomic fluctuations. We propose a simple model of investment financing and aid provision under asymmetric information that rationalizes such a pattern. We assume that donor agencies and recipient… Show more

Official development assistance is a key source of external finance in many developing countries. A striking feature of these aid flows is their positive correlation with business cycles in recipient countries. This pattern is puzzling in that it reinforces recipients’ already strong and costly macroeconomic fluctuations. We propose a simple model of investment financing and aid provision under asymmetric information that rationalizes such a pattern. We assume that donor agencies and recipient governments value projects differently, and that donors know less than recipients do about project characteristics. We show that donors can make a recipient government identify high-return projects by requiring that the latter contribute some of its own funds to projects. Providing these matching grants or ‘counterpart funds’ is less affordable for recipients during economic downturns, which leads to aid procyclicality. Our model produces aid contracts consistent with those used by aid agencies, rationalizes observed aid patterns, and yields a rich set of testable empirical predictions. Show less

Au cours des cinquante dernières années, l'aide internationale a été massive et soutenue. Pour certains pays, dont Haïti, on parle de l'équivalent de plusieurs plans Marshall par année pendant
plusieurs décennies. Pourtant de nombreux pays récipiendaires de cette aide internationale, dont Haïti, affichaient en 2007 un niveau de vie moyen plus faible qu'en 1960. L'aide internationale peut être un formidable moteur de développement. Elle peut aussi en être le plus grand frein. Dans ce texte… Show more

Au cours des cinquante dernières années, l'aide internationale a été massive et soutenue. Pour certains pays, dont Haïti, on parle de l'équivalent de plusieurs plans Marshall par année pendant
plusieurs décennies. Pourtant de nombreux pays récipiendaires de cette aide internationale, dont Haïti, affichaient en 2007 un niveau de vie moyen plus faible qu'en 1960. L'aide internationale peut être un formidable moteur de développement. Elle peut aussi en être le plus grand frein. Dans ce texte, nous mettons en évidence quelques travers importants de l'aide internationale et montrons sous quelles conditions, celle-ci pourra contribuer au développement d'Haïti. Show less

This paper investigates the importance of market incompleteness by comparing the rates of risk aversion estimated from complete and incomplete markets environments. For the incomplete-markets case, we use consumption data for the 50 US states. We find that the rate of risk aversion under the incomplete-markets setup is much lower. Furthermore, including the second and third moments of the cross-sectional distribution of consumption growth in the pricing kernel lowers the estimate of risk… Show more

This paper investigates the importance of market incompleteness by comparing the rates of risk aversion estimated from complete and incomplete markets environments. For the incomplete-markets case, we use consumption data for the 50 US states. We find that the rate of risk aversion under the incomplete-markets setup is much lower. Furthermore, including the second and third moments of the cross-sectional distribution of consumption growth in the pricing kernel lowers the estimate of risk aversion. These findings suggest that market incompleteness ought to be seen as an important component of solutions to the equity premium puzzle. Show less