We examine transfers and tied aid in a model with increasing returns to scale and monopolistic competition. Transfers give rise to an additional (love of variety) welfare effect and affect the utility possibility locus. Generic tied aid may exacerbate or reverse these results. The popularity of aid tied to specific manufactured goods can be explained through rent-seeking behavior since such aid gives rise to profits in the donor country. These profits in turn largely repatriate the transfer such that donors can appear to be more generous than they really are.

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doi.org/10.1016/0304-3878(95)00016-J, hdl.handle.net/1765/13077
Journal of Development Economics
Erasmus School of Economics

Brakman, S., & van Marrewijk, C. (1996). Transfers, returns to scale, tied aid and monopolistic competition. Journal of Development Economics, 333–354. doi:10.1016/0304-3878(95)00016-J