Aid Tied to the Donor's Exports

Abstract

The existing theory of tied aid presupposes that trade and aid are conducted in terms of private consumption goods. However, in such a world aid can be effectively tied only if the recipient government somehow prevents its households from reselling the aid basket on world markets. That weakness of existing theory is here removed by extending the theory to accommodate non-tradable public consumption goods. The most striking result of existing theory - that, even in a world of just two trading countries, the donor might benefit and the recipient suffer from the tying of aid - is preserved. Copyright 2005 Blackwell Publishing Ltd