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.

Bystander effects, International transfers, New Economic Geography, Transfer paradoxes, Welfare analysis
dx.doi.org/10.1016/S1574-8715(06)01003-7, hdl.handle.net/1765/120751
Frontiers of Economics and Globalization
no access
Erasmus School of Economics

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