Herding in aid allocation

Herding in aid allocation

To what extent do donors 'herd' in their allocation of aid? 

This article attempts to measure herding behaviour in the allocation of foreign aid, proposing different indexes that try to capture the specific features of aid allocation. The author chose to use two measures initially developed in finance and adapted them to the specifics of foreign aid. However, the different estimates all reject the hypothesis of no herding.

In this paper the author details:

  • Pure herding behaviour - which create pendulum swing effects comparable to those in financial markets
  • The different indexes detecting donor herding - its exact size depending on the measure adopted
  • The preferred index, relying on three year disbursements which indicates a significant level of herding, similar to that which is found on financial markets
  • Major differences across different types of donors i.e. there is no, or very limited, herding among multilateral donors, in contrast to bilateral donors, who are frequently subject to herding behaviour
  • Finally, it shows that observable determinants actually explain little of the herding levels, leaving a large part of herding unexplained.

The paper's conclusions include:

  • The preferred measure finds a herding level around 11 per cent. That implies that in a world where 50 per cent of all allocation changes are increases, the average recipient experiences 61 per cent of its donors changing their allocation in the same direction
  • There is no democratic premium in donor herding behaviour. Donors are not attracted by a democratic transition, though they shy away from authoritarian transitions
  • Natural disasters - perhaps obviously - see a large cluster of donor funding
  • There is still a lot to learn about donor allocation policies. This study leaves for future research the fundamental question of the motivations for donors to herd.