Aid diversion and the impact of Development Assistance for Health in a decentralized health system

The effects of foreign aid on a decentralised health system are analysed in a theoretical framework where the donor has imperfect information about the local health needs while the central and local governments do not engage in self-interested efforts upon receiving aid. I discuss the implications of conditionality of aid on local health expenditures, intergovernmental transfers and social welfare. I then examine these consequences in a health system with two levels of care when the donor restricts aid on Primary Health Care.