Strong states use foreign aid as side payments to form and maintain military alliances with small and poor states, to a degree not adequately appreciated in the international relations literature. The amount of aid necessary to form and sustain alliances with strong ones is affected by small states’ domestic politics—such as regime type (coalition size) and stability—and the divergence of their strategic interests with the strong power. The alliance and foreign aid literatures, however, have generally downplayed the importance of foreign aid in the formation of asymmetric alliances, have not explained when and why foreign aid matters for asymmetric alliances, have not adequately explained how domestic politics and strategic interests affect the aid levels needed to form and maintain asymmetric alliances. The dissertation fills these gaps in the literature. It probes why asymmetric alliances are formed and the role side payments play in the formation and maintenance of asymmetric alliances. A view that starts from the perspective of a leader’s interests in their domestic setting can give us a way to understand when the costs of an asymmetric alliance are offset by the gains and how side payments can serve as a mechanism to make the formation and maintenance of the alliance possible. The dissertation offers a trade-off theory of asymmetric alliances which contends that leaders in weaker states are motivated to form alliances with great powers to enhance their potentials for domestic political survival. External alliances may provide small state leaders access to external resources that will help them to rely less on expensive extraction from the society and to alleviate risky guns-and-butter trade-off in domestic distribution of resources. As prospective allies sometimes have interest divergence in forming an alliance, weaker parties may experience a deficit in utility from the alliance. The theory predicts that having interest divergence between prospective allies increases the likelihood that a great power uses side payments to cement an alliance with a small state. Side payments provide a compensation mechanism: a great power can offer a potential ally an increase in security through an increased level of side payments, such as economic aid, military equipment, arms or other logistical support. In return for side payments the small state offers concessions (such as changes in its internal policies or granting military bases) to the great power ally. The amount of side payments a small state leader needs as a compensation for his policy concessions depend on political institutions and constraints the leader faces to his political survival. Political institutions affect the bargaining options for leaders. The theory contends that the amount of side payments needed to compensate for policy concessions is likely to be smaller for small coalition leaders (typically seen in autocratic polities) than it is for large coalition leaders (usually seen in liberal democracies). During the maintenance phase of the alliance, the parties engage in a process of bargaining to continue the flow of benefits from the alignment as well as to minimize one’s costs and risks associated with the alliance commitments. Accordingly, the trade-off theory predicts that interest divergence between recipient and donor, as well as the availability of alternative donors, affect the flow of aid and the likelihood of alliance termination or realignment. Increasing divergence of interests leads either to alliance termination or to donors increasing the side payments made to a small state for its policy concessions. If there are substitute great powers who are willing to offer more side payments than the small state is getting (or expected to get) from the existing alliance and the expected costs for small states are equal to (or less than) the existing level, then the net value of realignment with another great power will increase. Thus, the theory predicts that a small state leader chooses to realign with another great power when the leader expects a higher payoffs of net value from the new alliance. Important domestic political changes in small states, such as changes in the existing political regime or leadership may affect the state’s alliance policies. The theory contents that, all else equal, a regime change in small states will be likely to cause one of the following outcomes: a) the new regime may terminate the existing alliance or b) the alliance remains intact in exchange for an increased level of side payments. If the alliance remains important to the great power, it will survive albeit for a higher price; otherwise, the alliance will be terminated. Lastly, the theory predicts that leadership changes, both in democratic and non-democratic small states, will have minimal impacts on the continuation of asymmetric alliances in the short run. Because most democratic leaders are constrained by domestic political institutions and rely on the support from different segments of society, it is difficult for them to make drastic changes in policy. Thus, an asymmetric alliance is likely to survive, at least in the short run, after a leadership change in a democratic small state. In the absence of any alternative great powers (as a prospective ally), a small coalition leader has incentives to continue the existing alliance, at least in the short run, which can provide him access to much needed external resources, such as military and economic aid. These resources enhance the new leader’s ability to produce private goods and to keep his coalition members loyal. The dissertation makes important contributions in the international relations scholarship. First, it presents a systematic study of alliance relations between asymmetric powers that focuses on leaders’ domestic political survival in weaker developing countries as a primary motivation for alliance formation with stronger states. Second, contrary to the existing theories of alliances in the literature, the dissertation shows that various forms of foreign aid, which I term side payments in the context of alliance bargaining, play an important role in the formation and maintenance of asymmetric alliances. Third, the dissertation offers a dynamic and process oriented approach that emphasizes that alliance agreements and accompanying security arrangements between strong and weak states are a result of bargaining processes. The trade-off theory is a process-oriented theory that probes not only why asymmetric alliances are formed but also how they are maintained. The theory underscores domestic political processes shaping small state leaders’ perception of threat and dynamic bargaining between allies and traces changes in alliance relations over time in response to changing strategic interests of allies. The dynamic nature of the theory provides a useful theoretical framework for the future research on not just alliances but on interstate negotiations for other security arrangements.