Preventing the Negative Externalities of Development: Aid Compliance, Incomplete Contracts, and State Capacity

Presented at the American Political Science Association (APSA) conference

This paper examines the potential negative externalities of foreign aid projects: that is, costs that accrue to people outside the aid transaction between the recipient state and the aid organization overseeing projects (the agent). Both the media and academia tend to blame agents for aid implementation problems. However, recipients are nowadays responsible for implementation, externalities can drastically affect people's livelihoods, and politicians want to avoid blame for aid failures. Accordingly, I argue that state capacity is a understudied explanation for aid externality prevention. To test the hypothesis, I compile new project-level datasets on World Bank Task Team Leaders and recipients' compliance with environmental and social risk management (safeguard) policies on involuntary resettlement, indigenous peoples, and the environment. Statistical support for the hypothesis suggests availability and representativeness biases in how academia and the media approach aid failures. More broadly, future scholarship needs to consider not just principal-agent relationships but principal-agent-recipient interactions and the role of incomplete contracts between agent and recipients. Otherwise, there is a risk of falling prey to a social engineering fallacy. [Preliminary Draft Paper]