How does inter-institutional competition affect the performance of multilateral development finance institutions?

Abstract

How does inter-institutional competition emerging from the creation of new multilateral development banks (MDBs) affect the performance of existing institutions? Since newly established MDBs can deprive incumbents of vital resources, existing banks have strong incentives to respond. Using a large dataset of 30 MDBs across 144 countries from 1946 to 2013, we first demonstrate that existing MDBs respond to the establishment of a new competitor by increasing assistance to countries eligible for lending from both the incumbent and the new MDB. Using project performance evaluation data from up to 12,116 projects between 1961 and 2017, we then show for the World Bank that competitive entry increases the performance of new projects, but not ongoing ones. We explain these results as follows: when faced with a new competitor, the World Bank prioritizes the development of high-quality projects that better match borrower demand. In contrast, ongoing projects are “locked in” and receive less staff attention, limiting opportunities for performance improvement. Importantly, these dynamics do not extend to other legacy MDBs. This underscores the World Bank’s unique position as a major institution capable of expanding its operations without compromising project quality in response to new competition.