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Optimal Income Transfers and Tariffs

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

Abstract

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.
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Suggested Citation

  • Kar-yiu Wong & Sajal LAHIRI & Pascalis RAIMONDOS-M & Alan D. WOODLAND, 1998. "Optimal Income Transfers and Tariffs," Working Papers 0076, University of Washington, Department of Economics.
  • Handle: RePEc:udb:wpaper:0076
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    File URL: http://faculty.washington.edu/karyiu/papers/lrww.htm
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    Cited by:

    1. Lahiri, Sajal & Raimondos-Moller, Pascalis, 1997. "Competition for aid and trade policy," Journal of International Economics, Elsevier, vol. 43(3-4), pages 369-385, November.

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