Transfers, returns to scale, tied aid and monopolistic competition

https://doi.org/10.1016/0304-3878(95)00016-JGet rights and content

Abstract

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.

References (32)

  • S. Brakman et al.

    A note on endogenous transfers

    Journal of Economics

    (1991)
  • S. Brakman et al.

    On the economics of tied aid

  • J.S. Chipman

    A survey of the theory of international trade, Part III

    Econometrica

    (1966)
  • J.-Y. Choi et al.

    Immiserizing transfers under variable returns to scale

    Canadian Journal of Economics

    (1987)
  • A.K. Dixit et al.

    Theory of international trade

    (1980)
  • A.K. Dixit et al.

    Monopolistic competition and optimum product diversity: Reply

    American Economic Review

    (1993)
  • Cited by (16)

    • Firm heterogeneity, comparative advantage and the transfer problem

      2018, European Economic Review
      Citation Excerpt :

      Only a few papers took this research direction. Brakman and van Marrewijk (1995) were the first to use a model of monopolistic competition to study the effect of transfers in the form of aid to developing countries. The key elements in their model are non-identical preferences between countries and home biased expenditure.

    • Varieties and the transfer problem

      2013, Journal of International Economics
    • Foreign aid, tariffs and nontraded private or public goods

      2002, Journal of Development Economics
      Citation Excerpt :

      This follows because it is implicitly assumed in, e.g. Yano and Nugent (1999) or this paper that the factor of the production capital cannot be sold in world markets to transform it into goods or other factors. The literature on tied aid is relatively large (see, e.g. Kemp and Kojima, 1985; Schweinberger, 1990; Brakman and van Marrewijk, 1995).7 A useful survey can be found in the recent book Brakman and van Marrewijk (1998).

    View all citing articles on Scopus

    Erasmus University Rotterdam, H8-13, Dep. of International Economics, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands.

    View full text