Review of Development Economics· 2026Q1
Does Aid Harm or Benefit Institutional Quality? Time Heals All Wounds
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- Q1SCImago
- 2026year
Short summary
Foreign aid initially harms institutional quality by enabling short-term expropriation of revenues, but this effect reverses after a few years as development benefits emerge, leading to a net positive impact.
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Key points
- Foreign aid has a differential impact on institutional quality based on the time frame.
- In the short run, aid leads to an 'aid expropriation effect,' harming domestic institutions.
- After a few years, the development effects of aid begin to positively influence institutional quality.
- The study utilizes a dynamic regression discontinuity design with data from ~100 countries (1989-2022).
AI-generated from the title and abstract; the full text is not read.
Abstract
ABSTRACT Previous research has found conflicting results regarding the effect of aid on the quality of institutions, with some studies finding a positive relationship, whereas others finding a negative one. In this paper, we try to reconcile these results. In a dynamic regression discontinuity design, we explore the dynamics of the above relationship. Using the threshold of aid allocation of the International Development Association and a sample of approximately 100 countries over the 1989–2022 period, we provide evidence that aid has a differential impact on the quality of institutions depending on the time frame. We argue that there is an aid expropriation effect in the short run, as individuals try to expropriate aid revenues, ultimately harming domestic institutions. However, when the development effect of international aid kicks in, and after a few years, there is a positive effect on institutional quality.
The authors' abstract, as published at the source. Review of Development Economics, 2026 · DOI ↗
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Field: Development
DevelopmentSocial Sciences