This paper analyzes the efficiency of aid allocation in reducing poverty. Paul Collier and David Dollar of the World Bank examine how aid is currently distributed and compare it to a poverty-efficient allocation. They find that the current aid allocation is significantly less effective in reducing poverty than a poverty-efficient allocation. In the efficient allocation, aid is targeted more towards countries with severe poverty and good policies, where 75% of the world's poor live. However, these countries currently receive a lower share of aid than their share of the world's poor. The study shows that even with the current allocation, aid lifts around 16 million people out of poverty annually. A poverty-efficient allocation could increase this number to around 30 million. Even with political constraints, the number could rise to 25 million. The paper argues that reallocating aid to be more poverty-efficient would be less politically difficult than tripling aid budgets to achieve the same impact. The authors estimate the impact of aid on growth and poverty reduction. They find that aid is more effective in raising growth when policies are better. They also find that aid has diminishing returns, meaning that the marginal efficiency of aid in terms of increases in income depends on the quality of policies and the amount of aid a country receives. They develop a poverty-efficient allocation of aid by mapping income to poverty and using different measures of poverty, such as the headcount index and the poverty gap. They find that the poverty-efficient allocation is very similar regardless of the poverty line used. The study shows that the current allocation of aid is inefficient in reducing poverty. The average cost of reducing poverty is higher than it would be with an efficient allocation. The paper argues that reallocating aid to be more poverty-efficient would be more effective in reducing poverty than increasing aid budgets. The authors conclude that while aid is allocated coherently, it is not efficient with respect to poverty reduction. They argue that the choice between aid for poverty reduction and aid for policy reform is relatively straightforward, as aid is effective for the former but not for the latter. However, there are other choices that are more problematic, such as using aid to reduce the risk of conflict or to boost private investment in newly reformed countries. The study highlights the importance of efficient aid allocation in reducing poverty and the need for donors to consider the impact of their aid on poverty reduction.This paper analyzes the efficiency of aid allocation in reducing poverty. Paul Collier and David Dollar of the World Bank examine how aid is currently distributed and compare it to a poverty-efficient allocation. They find that the current aid allocation is significantly less effective in reducing poverty than a poverty-efficient allocation. In the efficient allocation, aid is targeted more towards countries with severe poverty and good policies, where 75% of the world's poor live. However, these countries currently receive a lower share of aid than their share of the world's poor. The study shows that even with the current allocation, aid lifts around 16 million people out of poverty annually. A poverty-efficient allocation could increase this number to around 30 million. Even with political constraints, the number could rise to 25 million. The paper argues that reallocating aid to be more poverty-efficient would be less politically difficult than tripling aid budgets to achieve the same impact. The authors estimate the impact of aid on growth and poverty reduction. They find that aid is more effective in raising growth when policies are better. They also find that aid has diminishing returns, meaning that the marginal efficiency of aid in terms of increases in income depends on the quality of policies and the amount of aid a country receives. They develop a poverty-efficient allocation of aid by mapping income to poverty and using different measures of poverty, such as the headcount index and the poverty gap. They find that the poverty-efficient allocation is very similar regardless of the poverty line used. The study shows that the current allocation of aid is inefficient in reducing poverty. The average cost of reducing poverty is higher than it would be with an efficient allocation. The paper argues that reallocating aid to be more poverty-efficient would be more effective in reducing poverty than increasing aid budgets. The authors conclude that while aid is allocated coherently, it is not efficient with respect to poverty reduction. They argue that the choice between aid for poverty reduction and aid for policy reform is relatively straightforward, as aid is effective for the former but not for the latter. However, there are other choices that are more problematic, such as using aid to reduce the risk of conflict or to boost private investment in newly reformed countries. The study highlights the importance of efficient aid allocation in reducing poverty and the need for donors to consider the impact of their aid on poverty reduction.