Challenge Funds in International Development: Definitions,Variations and Research Directions

The use of challenge funds to promote economic and social development continues to grow but has been the subject of relatively little research. This article draws on institutional economics (particularly principal‐agent theory) to define challenge funds and review how they differ from other development funding mechanisms, taking into account their purpose, financial terms, interagency relationships, screening processes, selection mechanisms, implementation and risk sharing characteristics. It then draws on web‐based data for 50 challenge funds to analyse variation in some of these characteristics. The paper identifies evaluability as an important influence, including the relative importance attached to promoting the financial performance of grantees relative to the indirect social benefits of their activities. We conclude with suggestions for further research into the design and performance of challenge funds. Copyright © 2015 John Wiley & Sons, Ltd.