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Optimal Income Transfers and Tariffs

  • Kar-yiu Wong
  • Sajal LAHIRI
  • Pascalis RAIMONDOS-M
  • Alan D. WOODLAND

This paper investigates the optimality of international income transfers in a two-country model in which each country engages in non-cooperative trade policy behaviour. It is shown that unconditional income transfers can never be optimal for the donor country, which not only suffers the loss of income but is harmed as the recipient responds optimally by raising tariffs. It is further shown that it is possible for the donor to attach carefully designed conditionality rules to the aid package to ensure that the recipient will agree to the package and that the donor's welfare is improved. In fact, the use of conditional income transfers is shown to result in a Pareto efficient equilibrium.

(This abstract was borrowed from another version of this item.)

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Paper provided by Department of Economics at the University of Washington in its series Discussion Papers in Economics at the University of Washington with number 0076.

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Date of creation: Feb 1998
Date of revision:
Handle: RePEc:fth:washer:0076
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