Blended finance---the use of public and philanthropic funding to crowd in private capital---is a potential way to finance a more sustainable world. While blended finance holds the promise of being catalytic in mobilizing vast amounts of private capital, little is known about this practice. In this paper, we provide a conceptual framework that formalizes the decision-making of development finance institutions (DFIs) that engage in blended finance. We then provide empirical evidence on blended finance using data from a major DFI. The key variable we study is the level of concessionality, which captures the subsidy from the blended co-investment. Our findings indicate that DFIs provide higher concessionality for projects that have a higher sustainability impact per dollar invested. Moreover, the concessionality is higher for projects in countries with higher political risk and a higher degree of information asymmetries. In such cases, the blending tends to also include risk-management provisions. These findings are consistent with the predictions from our conceptual framework, in which DFIs have a limited budget that they allocate across projects to create societal value.
Authors
- Acknowledgements & Disclosure
- We are grateful to Matthieu Pegon for helpful comments. We thank Chandana Yelkur for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32287
- Published in
- United States of America
