What Motivates Private Foreign Aid? Evidence from Internet-Based Microlending

Although private foreign aid has expanded dramatically in recent years, we still lack detailed information on the allocation of those private aid flows. We use a novel approach to examine the funding decisions of individuals with respect to international development assistance. We analyze the speed at which requests from microentrepreneurs in developing countries are fulfilled through a US-based Internet organization that bundles individual contributions and transfers them as interest-free loans to developing countries. Survival analysis finds little evidence for the expectation that private donors behave as rational aid givers, nor do we see private funders mimicking the behaviors of official aid agencies. Rather, private microloans seem principally influenced by humanitarian crises, along with the presence of migrant and diaspora networks from recipient countries. We conclude that international private aid is shaped by social linkages between individual donors and recipients. It can therefore fund areas neglected by traditional foreign aid. As a result, private foreign aid serves, in at least some cases, as a complement to official development assistance.