Paper short abstract:

This research explores how risk aversion and risk management varies under different RBFA schemes, depending on the type and the size of the agent and the contract that is pursued.

Paper long abstract:

Results-based financing approaches (RBFA), in which donors disburse funds only after predefined results are achieved, are quickly growing more important and being used more often in development cooperation.

One of the key components in RBFA is the extent to which the risks are transferred from principal to recipient. While in traditional input-based approaches to aid the risk is mostly supported by the principal, RBFA are designed so that some or all of the risk is transferred to the agent. The level of uncertainty associated with the achievement forms the basis of the principal-agent problem.

The risk aversion of agents will also influence the cost of contracts and whether a RBFA should be used in the first place. The literature suggests that smaller agents or organisations will be more risk averse as the transfer will constitute a higher proportion of their budgets and their activities are more concentrated and volatile.

This research explores how risk aversion and risk management varies under different RBFA schemes, depending on the type and the size of the agent and the contract that is pursued. By unpacking risk dynamics this research aims to go one step further than just contributing to the debate of whether traditional or results based aid should be used, but rather to which type of agent results based financing approaches might be optimal.