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Tied Aid and Welfare

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Abstract

In this paper we present a model of tied aid to shed light on the dispute between Kemp and Kojima (1985) and Schweinberger (1990) and to complement their analyses. We show that if the households of the recipient country are not informed of the transfers at their consumption decision, they have an incentive to trade the purchased goods from their domestic production income whenever transfer paradoxes occur. We also demonstrate that when they are aware of the transfers and can trade the purchased goods from their production income, there are no transfer paradoxes under the normality condition of commodities. Copyright 2005 International Monetary Fund.

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