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The Transfer Paradox in a One-Sector Overlapping Generations Model

  • Partha Sen

    (Department of Economics, Delhi School of Economics, Delhi, India)

  • Emily T. Cremers

    (National University of Singapore)

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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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
Date of revision:
Handle: RePEc:cde:cdewps:159
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  1. 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.
  2. Galor, O & Polemarchakis, H M, 1987. "Intertemporal Equilibrium and the Transfer Paradox," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 147-56, January.
  3. 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.
  4. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 1-19, January.
  5. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November.
  6. Gale, David, 1974. "Exchange equilibrium and coalitions : An example," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 63-66, March.
  7. repec:ebl:ecbull:v:6:y:2006:i:3:p:1-8 is not listed on IDEAS
  8. 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.
  9. 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.
  10. Haaparanta, Pertti, 1989. "The intertemporal effects of international transfers," Journal of International Economics, Elsevier, vol. 26(3-4), pages 371-382, May.
  11. Tan, Kim-Heng, 1998. "International Transfers from Rich to Poor Nations," Review of International Economics, Wiley Blackwell, vol. 6(3), pages 461-71, August.
  12. Yano, Makoto, 1983. "Welfare aspects of the transfer problem," Journal of International Economics, Elsevier, vol. 15(3-4), pages 277-289, November.
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