Aid agencies have focused an incredible amount of time, money, and energy on improving formal institutions in developing countries, but broad improvements to institutional performance remain elusive. We investigate why institutional results have been so difficult to achieve with development finance, even as aid agencies have increased their monitoring and evaluation of observable targets as part of the “results agenda.” We show that recipient governments and project staff are more likely to achieve and maintain institutional targets when they choose formbased targets rather than functional targets as part of World Bank environment and natural resource management projects. This sets in motion a strategic logic where only countries that have a high likelihood of achieving functional targets are likely to choose them, because they can receive additional rewards as compared to when they achieve formbased targets. This leads to a separating equilibrium where the recipient countries most in need of institutional reform focus on outward, formbased targets that are less likely to improve the functionality of formal institutions.

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