| We develop a theoretical model of foreign aid to analyze a method of disbursement of aid which induces the recipient government to follow a more pro-poor policy than it otherwise would do. In our two-period model, aid is given in the second period and the volume of it depends on the level of wellbeing of the target group in the first period. We find that this way of designing aid does increase the welfare of the poor.;In the first chapter, we consider the situations where the donor and the recipient governments act simultaneously as well as sequentially, and find that by moving first in a sequential game, the donor country can, under certain conditions, increase the welfare of the poor and its own compared to the case of simultaneous moves. Foreign aid competition is introduced into this model, in the second chapter. Now, the model consists of three countries in which the two recipient countries compete for foreign aid. The donor disburses aid on the basis of developmental reforms or good governance. The donor faces a higher implicit cost of increasing aid to one country. The donor country has an additional tool in form of competition to discipline the recipient country. We find that if the governance deteriorates in one country then under certain conditions, the donor will punish the recipient by reducing the volume of aid to that country. The volume of aid to the other country will increase.;In further extending this analysis, we discuss the issue to child labor in the third chapter. In this chapter the recipient government tries to improve the skills of the poor. More precisely, the recipient government tries to reduce child labor and increase the skills of the children by improving the quality of schools. In this analysis, the volume of aid depends on the number of children getting education in the recipient country. We study the parent's decision to send their children to school. We find that the donor can increase the schooling rate and investment in education, despite being passive. We also find that an increase in aid will increase the welfare of the poor more when credit markets are perfect than when there are imperfections in the market. |
