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Foreign aid and political stability

Concerns about international terrorism make the stability of failing states central to Western foreign aid policies. This paper explores how donors reduce the volatility of aid to avoid political destabilization of recipient countries. Using a formal model, we show that stability-oriented donors control the risk of conflict, but they never fully eliminate it. Recipient governments can exploit donor preferences for stability through increased rent extraction. As a result, stability-oriented aid reduces the risk of political destabilization only under narrow circumstances. If these conditions are not met, stability aid makes conflict more likely. We present evidence for key predictions of our model.