Abstract: What’s wrong with development aid? It is argued that much of aid’s failure is related to the institutions that structure its delivery. These institutions govern the complex relationships between the main actors in the aid delivery system, and often generate a series of perverse incentives that promote inefficient and unsustainable outcomes. The theoretical insights of the new institutional economics are applied to several settings. First, the institutions of Sida, the Swedish aid agency, is investigated to analyze how that aid agency’s institutions can produce incentives inimical to desired outcomes, contrary to the desires of its own staff. Second, cases from India, a country with low aid dependence, and Zambia, a country with high aid dependence, are used to explore how institutions on the ground in recipient countries might also mediate the effectiveness of aid. Suggestions are offered on how to improve aid’s effectiveness. These include how to structure evaluations in order to improve outcomes, how to employ agency staff to gain from their on-the-ground experience, and how to engage stakeholders as “owners” in the design, resource mobilization, learning, and evaluation process of development assistance programs.

Keywords: development assistance, aid, Samaritan’s Dilemma, Sida, India, Zambia, institutional analysis, sustainability, ownership