Foreign Aid and Corruption

Abstract

Foreign aid and corruption have received a lot of scholarly attention in the recent decades, but there have only been a few papers empirically examining the causal relationship between the two. This paper uses a unique, large-scale panel dataset and an instrumental variable methodology to show that total foreign aid has a positive impact on the recipient country’s level of corruption, while the effects of the different subcategories of assistance are mixed. Additional specifications of the model also lead to varied results.