How Information about Foreign Aid Affects Public Spending Decisions: Evidence from a Field Experiment in Malawi

Abstract

Abstract Does foreign aid shift public spending? Many worry that aid will be “fungible” in the sense that governments reallocate public funds in response to aid. If so, this could undermine development, increase the poorest's dependency on donors, and free resources for patronage. Yet, there is little agreement about the scale or consequences of such effects. We conducted an experiment with 460 elected politicians in Malawi. We provided information about foreign aid projects in local schools to these politicians. Afterwards, politicians made real decisions about which schools to target with development goods. Politicians who received the aid information treatment were 18% less likely to target schools with existing aid. These effects increase to 22–29% when the information was plausibly novel. We find little evidence that aid information heightens targeting of political supporters or family members, or dampens support to the neediest. Instead the evidence indicates politicians allocate the development goods in line with equity concerns.