A Theory of Involuntary Unrequited International Transfers
The theory of involuntary international transfers (war indemnities) has been constructed on the assumption that the donor and recipient are completely indifferent to each other's well-being. The assumption is hard to justify since usually the transfers closely follow periods during which the countries have been dropping bombs on each other. In the present paper, we rework the theory on the more plausible assumption that the well-being of each country is negatively influenced by the well-being of the other country. It is shown that, contrary to the conventional theory, the donor might benefit at the expense of the recipient, even when local Walrasian stability is imposed.