Incentive Issues in a Multi-Model Aid System

Cash on Delivery Aid: Incentive Issues in a Multi-Model Aid System

Jessica Brown

Core Essay 3

[email protected]

20 November, 2008 8204

Abstract:

This essay examines the recent proposal of a new aid modality called Cash on Delivery

Aid (CODA), specifically asking whether CODA can improve upon the incentive structure of other aid modalities to deliver aid more effectively. I draw upon a body of theory that addresses incentive structures relevant to donor-recipient relationships to take lessons from empirical evidence of other aid modalities. I conclude that while CODA is very promising, its success will depend heavily on the success of other aid modalities, especially general budget support

(GBS). I suggest a model combining capped GBS and unlimited CODA.

Word Count: 4,998

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INTRODUCTION

The Center for Global Development (CGD) recently proposed Cash on Delivery Aid

(CODA), a modality whereby donors pay developing countries for the development outcomes they achieve. This is thought to incentivise recipient governments to supply greater effort towards development. In this paper I explore the nature of this incentive. I contrast it with incentives of other aid modalities and analyse it in the broader context of a donor-recipient relationship where each party is also subject to incentives from other relationships of which they are a part. I seek to answer the question whether CODA can improve upon the incentive structure of other aid modalities to deliver aid more effectively. I present a body of theory that addresses incentive structures relevant to donor-recipient relationships, namely game theory, moral hazard, and principal-agent theory. I draw upon these theories to take lessons from empirical evidence of other aid modalities that provide insight for CODA. I examine different forms of ex ante conditionality, where donors deliver aid with the condition that recipients subsequently adhere to conditions, and ex post conditionality where donors disperse funds after recipients meet conditions. I conclude that CODA is very promising, but its success will depend heavily on the success of other aid modalities, especially general budget support (GBS).

Moreover, CODA cannot simply rely on GBS being delivered separately; Success will depend on a coordinated aid package incorporating the two modalities. I suggest a package combining capped GBS and unlimited CODA.

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CASH ON DELIVERY AID

Birdsall and Barter, and Birdsall, Savedoff and Vyborny summarize the CODA model. In a CODA contract donors and recipients agree on a specific measure of progress such as number of children completing primary school. At a later set date, donors pay recipients an agreed-upon sum for every primary school completer over the number of completers established in a baseline study. CODA is “hands-off”; payments are not tied to any prescribed policies or inputs. The only conditionality is ex post since countries are required to have achieved specific outcomes. Mutually agreed-upon independent auditors verify results. The

CGD specifies that CODA should complement not replace current aid modalities, offering a way to increase the amount and effectiveness of aid, which donors committed to do in the Paris

Declaration on Aid Effectiveness. The CGD foresees several distinct benefits of CODA. First, focusing on specific outcomes and the transparency of payment conditions promotes accountability of donors and recipients to each other and to their citizens. Donors do not have a valid reason to withhold payments if they can point to specific results achieved from their taxpayers’ funds. Recipients are accountable to donors because they cannot receive funds until after they achieve results. They are more accountable to their citizens who witness their government’s viable opportunity to earn no-strings-attached funding and commitment to achieve specific, measurable development objectives. Second, being “hands-off” ensures that recipients assume responsibility which strengthens rather than undermines developing country institutions.

Third, CODA necessitates monitoring and evaluating outcomes which strengthens local institutions’ capacity to learn from results. Fourth, CODA complements many of the Paris

Declaration goals including increased harmonization between donors, reduced administrative burden on recipients, and increasing aid levels.

THEORIES

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Several theories examine incentives in the context of collective action problems and are applicable to aid delivery. I apply three to CODA.

Game Theory

Gibson et al apply game theory to aid effectiveness, starting with the assumption that the donor (“Samaritan”) acts out of concern for the benefit of others (38-39; 89). The authors use a two-party game model with ordinal payoffs, wherein both parties benefit if the Samaritan chooses to help and the recipient chooses to exert high effort, but the recipient benefits even more if they receive the help but extend only low effort:

Recipient

High Effort Low Effort Samaritan No Help 2, 2 1, 2 Help 4, 3 3, 4

Here donors “are better-off helping no matter what the recipient does” (39). Game theory warns that if a Samaritan-donor’s threat to withdraw aid is not credible, recipients have no incentives to exert high effort. This leads us to question whether the threat to withdraw aid is credible in the

CODA model. For CODA to succeed recipients must believe they will receive no payments if they fail to progress, which forces us to consider what happens when recipients fail (a consideration of Renzio and Woods).

If aid delivery is analogous to a repeated game then there is a risk that recipients will become aid-dependent. For example, if a developing country experiences a food shortage, donors are often quick to provide emergency food aid. Recipients know that Samaritan-donors will not stand for large numbers of people starving. Or they may know that self-interested donors have incentives to subsidize their own agricultural sector due to domestic pressures, and food aid is one way to do so. With this relative certainty that donors will bail them out in a crisis,

5 8204 recipients have little incentive to allocate their scarce resources to increasing agricultural productivity. They then allocate them elsewhere, potentially to a non-productive use. Here aid dependence arises due the fungibility of aid in the context of a repeated game. Moreover, dependency breeds further dependency since the lower incentives to invest in increasing productivity means that future opportunities for the recipient to earn revenue from a growing tax base may be lost (Gibson; 52, 89).

Presuming donors’ threats to withdraw aid under CODA are credible, incentives to produce certain results would likely encourage recipients to invest productively if this is a necessary step towards achieving the results that will reward them with aid. However, the problem of how to provide aid based on need remains; I doubt the United States is interested in paying for results in Finland.

Moral Hazard

Moral hazard is the idea that people (or governments) behave more riskily when they have insurance. Moral hazard considers situations where two parties make an agreement, yet one party has no incentives to stick to their portion of the agreement. Klein and Harford frame the dependency problem in terms of moral hazard (60). Taking the food aid example, recipient countries engage in riskier activities because they have insurance in the form of emergency assistance from developed countries. Moral hazard is a risk when an insurer has imperfect information about the party they are insuring. Azam and Laffont note “that governments of the

South have a level of drive for fighting poverty which is their private information” (27). This can make it difficult for donors to provide recipients insurance because donors are unsure if recipients will behave according to the donors’ interests. The main warning from moral hazard is that when aid is provided with ex ante conditionality, recipients have little incentive to adhere to the conditions.

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While some authors, notably those of the UN Millennium Project, advocate aid levels based on the financing gap needed to achieve development, Easterly shows the moral hazard problem of giving aid in this manner. If recipients can expect to receive more aid with a larger gap, they can simply lower taxes, demonstrate greater need, and receive more aid. With imperfect information about recipients, donors cannot be sure that recipients will not take more risks by lowering taxes, knowing that with the insurance provided through foreign aid they will not have to bear the consequences. By paying only after recipients achieve results, CODA renders the information problem obsolete. But again, it fails to address the issue of how to target aid where it is most needed.

Principal-Agent Theory

In principal-agent theory one party, a “principal”, tries to incentivise another party, or

“agent”, to do what the principal wants. Any insurance the principal provides the agent corresponds to diminished incentives for the agent to supply effort and/or avoid risk. In the case of aid delivery we may think of donors as principals and recipients as agents. Principals must adequately compensate agents to motivate them to participate in a contract. Agents have alternative uses for their resources, so principals must offer agents incentives greater than or equal to those offered via alternative opportunities. Principal-agent theory usually considers agents to be inherently risk-averse. Agents prefer a certain return of X to a gamble where the expected return is X (but could be higher or lower than X).

Principal-agent theory raises several concerns regarding incentives in aid contracts.

First: recipients’ opportunity costs. In an environment with other aid agencies (alternative principals that could offer contracts to recipients), the incentive effects of one aid agency may be negated or diluted. Gibson et al provide a case in point, where one recipient claimed that if

SIDA were to act on its threat to withdraw funding, they could simply approach the Japanese 7 8204 who had softer standards (75). With modalities using ex post conditionality, different standards on the level of performance rewarded create a “race to the bottom” (119). Thus, principal-agent theory highlights the scope for multilateral/coordinated aid delivery and raises concerns about the implications for CODA’s success should coordination fail. This is a key concern of de Renzio and Woods who argue that, CODA “would most likely be an additional modality that recipient governments have to ‘accommodate’, with potential additional transaction costs, and in competition with new sources of development assistance such as Chinese in Africa” (3).

Second, the trade-off between incentives and insurance is crucial in considering CODA, given that recipients are risk-averse. If CODA is to be implemented alongside existing aid modalities then we cannot assess its potential in isolation. We may hypothesise that combining

CODA and other modalities such as general budget support (GBS) may result in the incentives of CODA offsetting the moral hazard problems of providing insurance through GBS. Recipients would still have an incentive to raise taxes, for example, if it would help them to achieve the outcomes that CODA rewards. However, the greater the proportion of aid provided through

GBS, the lower the incentive effect of CODA would be. Achieving the appropriate balance of incentives and insurance (the essence of contract theory) is no small feat.

Third, we must acknowledge that incentives in the donor-recipient relationship may impact incentives in other principal-agent relationships within donor and recipient countries. For example, due to limited funds, developing country governments (principals) are often forced to provide long term employment so that employees (agents) are willing to accept low pay

(Gibson, 44). Because governments cannot offer employees sufficient incentives they must compensate them with increased insurance. Recipients could use increased aid revenue to pay higher salaries, enabling them to incentivise higher performance through less job security.

CODA’s hands-off approach does not prescribe such changes in local incentive structures, but presents an opportunity. Another example: recipients might start a program as Cambodia 8 8204 recently has, experimenting with output-based funds to provide water and sanitation facilities through contracts with private providers (Klein, 97-103; Birdsall and Barder, 10).

Milner applies the principal-agent model to domestic politics in donor countries, showing that when taxpayers (principals) feel unsure about whether the aid agency (agent) is serving their interests in development abroad, the agency can ease the problem by diverting aid through multilateral organizations (2). Voters in donor countries have only biased information about the benefits of their government’s aid agencies (who have incentives to misrepresent their impact) whereas multilateral agencies have fewer incentives to appeal to a particular country’s constituency (32). Milner’s analysis yields two points relevant to CODA. One, CODA presents another and perhaps better way of reassuring voters: literally using their taxes to buy results.

Second, if CODA does in fact resolve this domestic principal-agent problem the incentives for donors to deliver aid multilaterally may decline. However, the incentive of lower donor costs to obtain information about recipients (Azam, 51-52) is still present.

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EVIDENCE

Here I examine the experiences of different aid modalities with incentives in the donor- recipient relationship, and what these experiences suggest for CODA.

Ex Ante Conditionality under Structural Adjustment

The Economist’s oft-quoted piece on Aid to Kenya quite aptly portrays the problem with recipients’ lack of incentives under Structural Adjustment (SA), deserving citation here:

“Over the past few years Kenya has performed a curious mating ritual with its aid donors. The steps are the following. One, Kenya wins its yearly pledges of foreign aid. Two, the government begins to misbehave, backtracking on economic reform and behaving in an authoritarian manner. Three, a new meeting of donor countries looms with exasperated foreign governments preparing their sharp rebukes. Four, Kenya pulls a placatory rabbit out of the hat. Five, the donors are mollified and the aid is pledged. The whole dance then starts again” (The Economist, August 19, 1995).

Svensson’s study indicates this experience may have been common during SA. Examining approximately 200 SA programs, he and his colleagues “find no link between a country’s reform effort, or fulfillment of ‘conditionality’, and the disbursement rate” (383). Throughout the SA period, if donors ever withheld aid it was only temporarily, as occurred with Mozambique,

Nicaragua, Tanzania, Vietnam, Zambia and Zimbabwe, and in these cases new loans were provided with essentially the same sets of policy conditions attached (Riddell, 237). In a repeated game where donors failed to penalise recipients, recipients had no incentives to change their behaviour.

Devarajan et al’s study of ten African countries reveals the importance of country ownership of policy reforms, particularly in their analysis of the “two sustained reformers,”

Ghana and Uganda (15). Both countries were initially sceptical of market-based reforms. It was their own countries’ failed policies, not conditionality, which eventually led to local political movements for market-based policies (15, 22). In other countries the failure of ex ante conditionality meant that, “large amounts of aid to countries with bad policies sustained those

10 8204 poor policies” (6). And what has all this meant for the poor? Chen and Ravallion’s study reveals in the developing world excluding China the number of people living on less than $1 per day rose slightly from 1984 to 2001 (23). This failure has led Sharpe and many others to endorse the Country-led model. This recent emphasis on country ownership has led to donor-recipient relationships based on Poverty Reduction Strategy Papers (PRSPs) produced by developing country governments (Riddell, 239).

Ex Post Conditionality Modalities

Given the failure of ex ante conditionality explained above, many donors are moving towards various forms of ex post conditionality. This includes aid based on policies or outcomes that have already been achieved. I examine three of the most pertinent examples here.

Millennium Challenge Corporation

Over the last two decades, donors have become increasingly selective in their allocation of foreign aid, targeting “poor countries that [already] have reasonably good economic governance” (Dollar and Levin, 2004). More recently, the MCC exemplifies donors’ increasing selectivity in favour of good performers (Herrling and Radelet, 3). The MCC conditions their selection of recipients on the basis of data from third-party sources including Freedom House, the World Bank, WHO, UNESCO, IFC, and the Heritage Foundation (MCC). They rank countries on their commitment to rule justly, invest in their people, and promote economic growth using the following indicators: civil liberties, political rights, voice and accountability, government effectiveness, rule of law, control of corruption, immunization rates, public expenditure on health, girls’ primary education completion rate, public expenditure on primary education, business start-up, inflation, trade policy, regulatory quality, fiscal policy, natural resource management, and land rights/access (MCC).

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One of the most useful lessons of the MCC experience is that when donors have a credible threat to say “no” it creates powerful incentives for recipients. Randall Wood cites many examples of this incentive effect, including Nicaragua where “in refusing to proceed with [the country’s] compact—including over $100 million in funds for a massive roads rehabilitation program—until a funding mechanism was established to provide for ongoing road maintenance, the MCC helped Nicaragua to institutionalize a road maintenance program for the first time in its history” (4). The flipside of this coin is that the MCC’s high level of selectivity has meant few countries have actually received aid. The MCC’s “Threshold Program” attempts to address this.

Currently the rather loose eligibility criteria for the Threshold Program are that countries demonstrate a commitment to meeting the MCC indicators (CGD). Still, the New York Times

(December 7, 2007) reports that the MCC has spent only $155 million of the $4.8 billion approved for it, leading many in the US Congress to advocate slashing much of the remaining funds. The Times notes that some countries previously considered Threshold would fall of the list, leading the MCC’s Country Director for Burkina Faso to ask:

“What type of message does that send to Burkina Faso, a country that has spent a huge amount of political capital and money on this process?... What does that tell the Togos, the Nigers that want to become eligible? It tells them: Do everything like Burkina Faso, make all these reforms, spend millions of your own money, and then maybe at the end we might be able to sign a compact with you — or maybe not.”

The MCC’s problem not a credible threat but a credible promise for rewards. With ex post conditionality recipients must be sure they will in fact receive the funds if they deliver results, otherwise the incentive diminishes.

GAVI Alliance

The GAVI Alliance and the European Commission are coordinated aid packages that include initial budget or sector support followed by variable funding conditioned on outcomes.

Through GAVI’s Immunization Support Services (ISS), countries with relatively low (under 80%)

12 8204 levels of vaccination coverage for DTP3 (diphtheria, tetanus and pertussis) apply for funding by presenting a plan to increase child immunization rates. If approved, they receive an aid package including an initial payment and payments contingent on their progress. Recipients can use the funds in any manner they deem appropriate for increasing vaccination coverage (Chee, ix-xi;

Vyborny, 3-4). GAVI recently finished “Phase 1” of ISS funding and produced a report detailing recommendations for future phases (Chee).

GAVI’s experience points to two key lessons for CODA. First, is the enormous importance of getting the indicators right in any performance-based aid model. The Phase 1 study revealed:

“GAVI’s focus on number of children immunized rewards countries with higher population growth, potentially even those countries in which the DTP3 coverage rate is decreasing. Our finding that the population growth rate alone explains 76% of whether a country receives rewards is cause for further examination of the reward system. Based on the quantitative analysis, receiving rewards has little effect on performance” (Chee, xiv).

A similar concern could apply to the CGD proposal to pilot CODA using the indicator of number of primary school completers. In the long run it may punish countries for reducing population growth after the baseline is completed. Second, GAVI’s experience is strong evidence in support of CODA’s “hands-off” approach. The Phase 1 study participants applauded the flexibility ISS allowed local immunization programmes (Chee, xv). Moreover, the evaluation argues that “the lack of statistical correlation between performance, and how ISS funds are used also means we do not have any basis for recommending that countries use funding in any particular manner” (Chee, xv).

European Commission

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The European Commission has a unique approach to aid delivery combining GBS or

“fixed tranche” with performance-based aid or “variable tranches”. The fixed portion is subject to ex post conditionality on macroeconomic stability, public financial management, and the “broad strategic context” (usually the PRSP in low-income countries). This is similar to but significantly more narrow than the MCC selection criteria. Variable tranches provide additional funding according to the extent to which recipients meet their pre-defined development targets (EC, 1).

The EC experience also yields valuable lessons for CODA. Again, we see that saying

“no” to recipients is possible: the EC had 3 recipient requests to change indicators used for

“variable tranche” funding that were denied (43). For example, in 2001 Mozambique appealed to the EC to exclude some of the vaccination indicators because of the floods they had experienced. The EC denied this request because the baseline year (2000) had experienced worse flooding than occurred in 2001 “making it difficult to believe that... flooding could be responsible for one but not the other” (43). However, this moral hazard problem likely would not have been overcome if the donor were not also providing other forms of aid. Because they were also supplying GBS, they knew that saying “no” would not result in catastrophe for the recipient.

Thus the Samaritan-donor did not have enough incentive to simply cave in to the demands of the recipient to modify the indicators.

The incentive effect of the EC’s variable tranche is real but limited. This appears to be due to the particular balance of fixed and variable funding amounts (in other words, that trade- off between insurance and incentives from principal-agent theory). On average the variable tranche is only one third of the EC’s funding to any given country (47). There is only about a 20 percent difference in the variable amounts disbursed to the most successful as compared with the least successful countries (37). Keeping in mind that the variable tranche is only a portion of the total funding received, this meant that performance only accounted for about 8% of the total funding, “a relatively modest incentive” (37). 14 8204

In the EC’s experience the diversification of risk is important for recipient countries. This is reflected in performance across different variable tranches. Often the same country performed very well in one tranche but poorly in another. The following table, modified from the

EC’s report on budget support (83) shows that while these three countries received relatively similar percentages of the variable tranche disbursed (and thus had similar overall success in reaching their targets), they had widely differing success rates within the different sectors:

Overall Disbursement Sector Performance Rate Public Percent Financial Educatio Year Country Disburse Budget Health Managemen n d t 2003 Mozambique 66.7 85 100 83 38 2003 Zambia 62.5 n/a 66.7 67 50 Burkina 2004 69.9 73.3 50 64.2 80 Faso

This exposes a concern with the way the CGD currently presents CODA, using a singular indicator as the basis for rewards.

Exploring a General Budget Support/Cash on Delivery Aid Package:

Preceding examples showed that a donor’s ability to say “no” is key to maintaining incentives that promote development. I argue that in order to have a credible threat under

CODA, donors will need to come up with an answer to the question of what happens when countries fail. Boissiere notes that while the CGD’s “assertion that countries are not starting from a blank slate may well be true, especially in some aid-dependent countries, it is not an assertion that always could be taken for granted” (1). Combining CODA with GBS offers a potential solution. Contrary to project-based aid, which often prescribes very particular policies,

GBS would interfere minimally with the incentives of CODA. GBS counterbalances the solely

15 8204 incentive-based CODA with insurance, in a way that loans cannot since loans increase risk in the case of failure (because countries would end up failing and in debt).

The question then becomes: to whom do donors provide GBS, how much do they provide, and under what conditions? And what has been the experience of GBS to date? De

Renzio and Woods summarize the key findings of the IDD and Associates review of GBS in

“The evaluation found a series of positive effects of [GBS] on recipient country institutions, including on transaction costs, on budget transparency and on allocation and operational efficiency. On the other hand, however, it found that ‘the potential effects of [GBS] were reduced in cases where large flows of aid remained off-budget and/or un- integrated with national planning and budgeting procedures. This is partly because of the continuing direct consequences of modalities running in parallel, and partly because it limits the scale effect of [GBS]” (3-4).

Here we observe diluted effects of GBS contracts in environments with multiple principals.

Maximizing CODA’s effectiveness will require addressing GBS’s coordination and harmonisation challenges (de Renzio, 3-4).

Many authors have noted that GBS is more effective than project-based aid in instances where there is at least a rough correspondence between the preferences of the donors and recipients (Cordella and Dell’Ariccia, 1260; Herrling and Radelet, 2). How to determine the extent to which those preferences are aligned is another question, essentially that of conditionality. We have seen from SA that ex ante conditionality is a failed strategy. The MCC’s ranking system rewards results achieved, both policies and specific outcomes. It would be absurd to use an MCC-like model of conditionality for the GBS portion of a GBS-CODA aid package, as this would essentially mean the GBS would be an extension of CODA in disguise

(recall that one of the MCC indicators is girls’ primary education completion rate!). This indeed a exposes the tension posed by the fact that the poorest countries have the greatest need for

16 8204 budget support, and yet usually have the weakest financial management and fiduciary standards due to the fact that it costs money to strengthen those systems (Herrling and Radelet,

4; UN Millennium Project, 112). Herrling and Radelet then pose the question “how can [GBS] … be provided in such a way that it creates incentives to continually strengthen financial systems and institutions in the recipient country?” (5). In order to determine the conditions required for the GBS portion, it is worth exploring the Millennium Project’s suggestions for distinguishing between governments that lack volition and those that lack capacity to carry out reforms (113).

Another key dilemma is how much aid to provide. On the one hand Adrian Wood’s concern for the lack of accountability of a recipient country government to its citizens in situations of aid dependence leads him to propose that donors collectively place a cap on aid delivery: “This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals.” On the other hand, the UN Millennium Project’s analysis (239-40) shows that such a cap would mean that poor countries would not have enough revenue to achieve the

MDGs. Their needs assessment estimates the total cost of investments in low income countries at $70-80 per capita in 2006, however at that time “low-income countries, even after... a major increase in resource mobilization, [would have] require[d] $40-50 per capita in external finance”

(240). Putting together these two realities, one possibility worth exploring is capping GBS only and leaving CODA to make up for the shortcoming between the capped amount and the amount needed. The GBS would provide at least some insurance for the recipient, but not so much that they would lose the incentive to supply effort. Meanwhile, if CGD analysts are correct that results-based aid fosters recipient governments’ accountability to their citizens, then extra

CODA would increase rather than decrease this accountability.

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It is essential to acknowledge that a capped GBS/CODA model would mean the poorest countries with the least ability to raise tax revenue would receive less GBS than less-poor countries. However, if all the poor countries receive increased aid levels, then the poorest countries would benefit even if the less-poor countries benefited more. Moreover, CGD notes that given a common price tag for outcomes achieved under CODA, funds would have the greatest impact in the poorest countries where they can be stretched the furthest (Birdsall and

Barder, 9). Considering all the alternatives examined, capped GBS combined with unlimited

CODA may be a “second-best” option for aid delivery in a world where no ideal exists.

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CONCLUSIONS

Through applying collective action theories to incentive problems in existing aid modalities, I have arrived at the suggestion of a modality combining capped GBS and unlimited

CODA (henceforth “Fred”). I now review the concerns the theories rose to reinforce this recommendation.

1. Game theory shows the importance of the credibility of the donors’ threat to say “no”. As Fred uses ex post conditionality for both the GBS and CODA and provides some insurance, the threat is credible.

2. Game theory warns of aid-dependency. It is too early to tell whether dependency is a problem with the MCC, GAVI, or EC. This area deserves further exploration. However, Fred does avoid the problems experienced under structural adjustment related to unenforceable loan conditionality (moral hazard), which have contributed to dependency.

3. The moral hazard problem of “needs-based” financing is overcome when GBS is capped.

4. Principal-agent theory warns that an environment with multiple principals dilutes the incentive effects of any aid package. Fred should be delivered multilaterally and would require extensive coordination between donors. Increased coordination would also address de Renzio and

Woods’ concern that CODA would most likely be an additional modality that developing countries would have to accommodate.

5. Principal-agent theory exposes the trade-off between incentives and insurance. While the provision of insurance, especially to the poorest countries, is less than ideal under Fred, it provides the most insurance possible without jeopardising recipients’ accountability to their citizens. If delivered in a coordinated, predictable fashion, it would provide far more insurance than recipients currently receive. There are additional ways that may provide insurance through

19 8204 diversification of risk. The EC example shows it may be worthwhile to consider multiple indicators from multiple sectors for the CODA portion. This would also minimise the effects if a particular indicator misrepresented progress (as in GAVI’s experience). Fred could easily provide a larger proportion of results-based aid than the EC has, especially for the poorest countries where GBS would be more limited, increasing the incentive effect.

6. Principal-agent concerns apply to other relationships within donor and recipient countries. By capping the GBS, Fred allows for citizens in developing countries to act as principals who provide incentives for their government (agent) to pursue their interests. The large CODA portion would also reassure the taxpayers (principals) in donor countries.

Cash on Delivery Aid is indeed a promising improvement on current aid delivery modalities. I propose that in order to maximise its success donors should combine it with capped general budget support.

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