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Optimal foreign aid and tariffs

Authors
Journal
Journal of Development Economics
0304-3878
Publisher
Elsevier
Publication Date
Volume
67
Issue
1
Identifiers
DOI: 10.1016/s0304-3878(01)00178-x
Keywords
  • Nash Tariffs
  • Foreign Aid
  • Tied Aid

Abstract

Abstract This paper investigates the optimal choice of foreign aid when trade policies are decided in a non-cooperative fashion. Three alternative scenarios, depending on the timing of the actions and on whether aid is tied, are analyzed. It is shown that, in the case where aid is decided before tariffs, untied aid can lead to the reduction of the recipient's optimal trade tax. When the donor can tie the aid to a reduction in the recipient's tariff, the optimal aid level is always positive and the world can always achieve a Pareto-efficient equilibrium.

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