Decentralized Aid and Democracy

Abstract: Can aid delivered by NGOs exacerbate inequality? I show that when nongovernmental organizations deliver aid, beneficiaries have incentives to reduce electoral support for state-led redistribution. Developing a model of vote over public finances, I show that NGOs can crowd out governmental spending, turning private aid into a negative externality for the poor that do not directly benefit from foreign assistance. In the model, a representative NGO trades-off between the intensive and the extensive margin of its project. I characterize the conditions under which this trade-off affects the size of the externality and overall welfare.