This paper studies the aid allocation rule used by major development agencies, and investigates optimal allocations when recipients are neoclassical economies undergoing transition dynamics. When recipients face aid absorption constraints, allocations that favor poorer recipients are not always optimal, contrary to what is assumed in assessments of donor performance. The most significant determinants of the optimal sensitivity to recipient characteristics are aid generosity and the extent of absorption constraints. In neoclassical recipients aid can only accelerate growth where there is already growth, so growth-targeting achieves little and optimality is largely a matter of balancing recipient ...
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