Why do aid agencies exist?

Abstract

This article seeks to explain the organisational set-up of foreign aid delivery from a Coasian perspective: Why are there many and different aid organisations and not just one? Why is foreign aid not transferred directly from donor to beneficiary? With zero transaction costs and fully shared preferences between donors and beneficiaries, there would be no need for aid agencies. Their role is not so much to transfer funds or goods and services to developing countries, but (a) to reduce ex-ante transaction costs and (b) to mediate between the diverging preferences of donors and recipients, and package aid flows in a contract that reduces ex-post uncertainties for donors. Outcomes differ according to types of agencies and aid delivery instruments. © Overseas Development Institute, 2005.