"Information Distortion in Participatory Development Programs"

Common wisdom as well as sound analytical arguments suggest that stronger punishment of deviant behavior meted out by a principal typically prompts the agents to better conform with his objectives. Addressing the specific issue of donor-beneficiary relationships in the context of participatory development programs, we nevertheless show that greater tolerance on the part of donors may, under certain conditions, favor rather than hurt the interests of the poor. Also, greater uncertainty surrounding the donor's knowledge regarding the poor's preference may have the same paradoxical effect. Critical features of our framework are: (i) communities are heterogeneous and dominated by the local elite in dealing with external agencies, (ii) the elite choose the project proposed to the donor strategically, knowing that the latter has a certain amount of tolerance toward elite capture and an imperfect knowledge of the poor's priorities.