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Donors often condition foreign aid to recipients on policy adjustments. How do domestic interest groups influence a donor’s ability to credibly commit to implementing threats and promises? In our model, domestic interest groups in the donor country can mobilize to support the donor’s implementation of punishments and rewards. The expectation of such mobilization influences the credibility of threats and promises at the prior contracting stage. The analysis produces three central findings. First, the donor chooses to rely on a single instrument when the domestic interest group exhibits a strong preference for that instrument, even if the cost of using that instrument is relatively high. Second, for credibility reasons the donor often promises generous rewards or threatens ruthless sanctions that seem out of proportion. Finally, the donor cannot simultaneously make credible threats and promises unless domestic interest groups mobilize to support both instruments. We examine the case of US foreign aid to Israel and Palestine to illustrate these theoretical propositions. [ABSTRACT FROM PUBLISHER]