Grants or Loans: Development Finance and Incentive Effects
Author: Michael Klein and Tim Harford Date: 3/1/2005 (PDF, 200KB)
Some people think the best way to give aid is through grants. Others advocate aid embedded in subsidized loans. Mostly, incentive effects on donors and recipients are ignored in this debate. But grants and loans carry different incentives and in some settings can be complementary. Donors should offer a wider menu of options, including ongoing forgiveness of loans, unbundled subsidies, and loans combined with output-based grants. Donor agency staff should be rewarded for outcomes, not volume of funds out the door.
For more information on this topic please see our special feature on the Future of Aid.