We combine a key issue in development economics (explaining core-periphery pat-terns) for the first time with an analysis of unilateral transfers (foreign aid) using a New Economic Geography model. We show that (i) direct transfer paradoxes are not possible in a symmetric setting even if a bystander is present, (ii) the effects of foreign aid depend on the level of economic integration, (iii) aid only has a temporary effect (even if there is a bystander present) if the initial equilibrium is stable, and (iv) the recipient as well as the bystander benefits from foreign aid if the donor is large.

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Keywords Bystander effects, International transfers, New Economic Geography, Transfer paradoxes, Welfare analysis
Persistent URL dx.doi.org/10.1016/S1574-8715(06)01003-7, hdl.handle.net/1765/120751
Series Frontiers of Economics and Globalization
Rights no access
Brakman, S, Garretsen, J.H, & van Marrewijk, J.G.M. (2006). Agglomeration and aid. In Frontiers of Economics and Globalization. doi:10.1016/S1574-8715(06)01003-7