| Sumario: | Disagreement about aid-allocation criteria still exists, despite several cross-sectional studies that try to quantify the process by which official developmental assistance (ODA) is allocated. These models may have been inconclusive and unpersuasive due to their reliance on ad hoc empirical models. Their failure to account for the heterogeneity of recipient countries means that these models are of limited usefulness if there are unobserved recipient-specific variables that are correlated with one or more of the explanatory variables. In addition to the heterogeneity bias that may arise in these cross-sectional studies, a problem exists in that they implicitly assume that when a donor makes its ODA allocation it does not take into account the ODA that recipients receive from other sources. A theoretical model of ODA allocation, which is derived from the simultaneous optimization decisions of donor countries and allows for the existence of unobserved recipient-specific variables, is developed.
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