Over the past three decades multilateral financial aid has become an important institutional arrangement enabling environmental cooperation between developed and developing countries. However, previous research suggests that financial institutions are largely ineffective in achieving environmental goals. I show that financial assistance can be successful in increasing recipients’ contributions to environmental programs, thereby promoting environmental protection. This positive impact of aid, I argue, should be attributed to the effects of donor-recipient interactions that can alter incentives of recipient governments and induce their cooperation rather than to capacity building through inflows of aid. I study environmental assistance by first developing a game-theoretic model of strategic interaction between the donor and aid recipients. To avoid a common methodological problem of misspecification and to unify theory with empirical testing, I then derive a strategic statistical model and conduct empirical tests using a new dataset on projects financed by the Global Environment Facility.