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The Transfer Paradox in a One-Sector Overlapping Generations Model

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Author Info
Partha Sen (Department of Economics, Delhi School of Economics, Delhi, India)
Emily T. Cremers (National University of Singapore)

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Abstract

This paper examines the effects of international income transfers on welfare and capital accumulation in a one-sector overlapping generations model. It is shown that a strong form of the transfer paradox-- in which the donor country experiences a welfare gain while the recipient country experiences a welfare loss—may occur both in and out of steady state. In addition, it is shown that a weak form of the transfer paradox—where either the donor or recipient (but not both) experience paradoxical welfare effects—may characterize all segments of the transition path not already characterized by the strong transfer paradox. The results are explained by the effects of transfers on world capital accumulation and the world interest rate, which imply secondary intertemporal welfare effects large enough to dominate the initial effects of the income transfer.

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Publisher Info
Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 159.

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Length: 34 pages
Date of creation: Aug 2007
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Handle: RePEc:cde:cdewps:159

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Related research
Keywords: Transfer problem; transfer paradox; dynamics; one-sector overlapping generations model;

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Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F35 - International Economics - - International Finance - - - Foreign Aid
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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  1. Gale, David, 1974. "Exchange equilibrium and coalitions : An example," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 63-66, March. [Downloadable!] (restricted)
  2. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Tan, Kim-Heng, 1998. "International Transfers from Rich to Poor Nations," Review of International Economics, Blackwell Publishing, vol. 6(3), pages 461-71, August.
  4. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1985. "The Generalized Theory of Transfers and Welfare: Exogenous (Policy-imposed) and Endogenous (Transfer-induced) Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 697-714, August. [Downloadable!] (restricted)
  5. Haaparanta, Pertti, 1989. "The intertemporal effects of international transfers," Journal of International Economics, Elsevier, vol. 26(3-4), pages 371-382, May. [Downloadable!] (restricted)
  6. Sosin, Kim H & Fairchild, Loretta G, 1984. "Nonhomotheticity and Technological Bias in Production," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 44-50, February. [Downloadable!] (restricted)
  7. Yano, Makoto, 1983. "Welfare aspects of the transfer problem," Journal of International Economics, Elsevier, vol. 15(3-4), pages 277-289, November. [Downloadable!] (restricted)
  8. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1983. "The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World," American Economic Review, American Economic Association, vol. 73(4), pages 606-18, September. [Downloadable!] (restricted)
  9. Mitsuyoshi Yanagihara, 2006. "The strong transfer paradox in an overlapping generations framework," Economics Bulletin, Economics Bulletin, vol. 6(3), pages 1-8. [Downloadable!]
  10. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December. [Downloadable!] (restricted)
  11. Galor, O & Polemarchakis, H M, 1987. "Intertemporal Equilibrium and the Transfer Paradox," Review of Economic Studies, Blackwell Publishing, vol. 54(1), pages 147-56, January. [Downloadable!] (restricted)
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  12. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November. [Downloadable!] (restricted)
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