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The proliferation of aid projects--particularly the failure of donors to coordinate them--is often criticized as one of the ways the foreign aid system is running amok. Tanzania alone had more than 1,500 aid commitments from 2001 to 2003. Mozambique had even more. Evidently, each donor wants its own school-building project, its own HIV prevention campaign, and so on. These projects share the goal of improving the lives of the world's poor. And the detailed oversight possible in such targeted projects may improve administration. But it often burdens recipient governments with reporting requirements, donor visits, and other administrative costs, siphoning off scarce domestic recipient resources from directly productive use.

In this Working Paper, David Roodman presents a model of aid projects that reflects both sides of this coin. He posits a distinction between national-level governance and project-level governance. A donor can raise project-level governance by requiring oversight activities of the recipient, although the benefits from doing so are less where national-level governance is already high. Large projects, which Roodman's model assumes demand proportionally less oversight activity from the recipient, maximize development where aid volume is higher, by not overburdening recipient administrative capacity; where recipient resources are scarcer, for the same reason; and where national governance is good, since the marginal benefit of oversight is then lower. A multi-donor generalization shows how donors who care most about the success of their own projects (being "selfish") tend to sink into competitive proliferation, in which each donor subdivides its aid budget into smaller projects to raise the marginal productivity of the recipient's resources in those projects and attract them away from other donors. As a result, projects proliferate and development falls. Fundamentally, the inefficiency arises from the lack of a market among donors for recipient resources. But the smallest selfish donors actually gain, which discourages them from cooperating with other donors to contain competitive proliferation.