Aid Conditionality and Military Expenditure Reduction in Developing Countries: Models of Asymmetric Information

The paper analyses problems of implementing non-economic conditionality, such as military expenditure reduction, in the granting of foreign aid given the presence of asymmetric information. We present two conceptually separate principal-agent models, to capture the stylised facts of multilateral and bilateral aid negotiations respectively. The first model is an application of the problem of adverse selection when there is more than one type of principal (donor) with varying objectives. The second model extends moral hazard to double moral hazard, where neither principal nor agent (recipient) can fully observe or verify each other's strategies.