INTRODUCTION

Chapter 2 examined the impact on aid performance of information asymmetries between principals and agents within an official aid agency. This chapter analyses the impact of information asymmetries between the aid agency, donors and taxpayers and aid services suppliers. Later on in the chapter, information asymmetries between the agency and its political principals will also be added. The main purpose of this chapter is to demonstrate how these information asymmetries explain some of the observed behavioural characteristics of aid organisations and how foreign aid performance is to a large extent determined by donor country domestic policy concerns, not only by policies in the recipient country.

A major cause of these fundamental information asymmetries is inherent to foreign aid: in contrast to domestic transfer programmes, foreign aid programmes transfer wealth to intended beneficiaries outside the constituency of the taxpayers who pay for it and the politicians who decide on it. Foreign beneficiaries have no direct political leverage on donor country decision-makers. It is somewhat hard to see why donor country politicians would use voters' taxes to satisfy the needs and wishes of non-voters, unless voters have a stake in it too – that is, unless there is domestic demand for foreign aid transfers.

The geographical and political dislocation between donors and beneficiaries results in a broken information feedback loop that induces performance bias in aid programmes because it has an asymmetric impact.