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ESSAYS ON THE POLITICAL ECONOMY OF INTERNATIONAL FINANCIAL INSTITUTIONS' AID

The first half of the dissertation studies how conditional lending by International Financial Institutions (IFIs) affects the implementation of economic reforms. In the presence of asymmetric information about the outcome of a structural reform between an opportunistic agenda-setter government and an opposition with veto power, conditional lending by IFIs has a direct effect on the relative payoffs of domestic groups that results in a trade-off between increasing the range of parameter values for which reforms are adopted (and the payoffs from adoption), and lowering their payoffs if reforms are not adopted. Additionally, the combination of asymmetry of information and policy conditionality can render the government unable to credibly transmit information to the opposition, leading to a failure to adopt reforms or to a distortion of the incentives of incumbents regarding optimal macroeconomic policies, encouraging them to take actions that worsen macroeconomic outcomes in order to signal the desirability of some structural reforms. The second half of the dissertation studies the impact of IFI aid on domestic conflict. Given an initial equilibrium in which domestic groups are in conflict over resources, an IFI's ability to limit a country's indebtedness may lead to an increase in the amount of resources devoted to production, thus increasing welfare. However, there is a trade-off because such a policy entails costs to society in terms of a reduced possibility of consumption smoothing. Additionally, it can result in a redistribution of power among domestic groups, a result that can help identify and explain differing attitudes towards IFIs within developing economies.