Working Paper: CEPR ID: DP9596
Authors: Patrick Carter; Fabien Postel-Vinay; Jonathan Temple
Abstract: This paper introduces a framework for studying the optimal dynamic allocation of foreign aid among multiple recipients. We pose the problem as one of weighted global welfare maximization. A donor in the North chooses an optimal path for international transfers, anticipating that consumption and investment decisions will be made by optimizing households in the South, and accounting for limits in the extent to which recipients can effectively absorb aid. We present quantitative results on optimal aid policy by applying our approach to a neoclassical growth model, where the scope for aid-funded growth is determined by the recipients' distance from steady-state.
Keywords: aid allocation; economic growth; foreign aid
JEL Codes: F35; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign aid (F35) | Economic growth (O49) |
| Foreign aid (F35) | Consumption (E21) |
| Foreign aid (F35) | Investment (G31) |
| Higher aid (F35) | Higher consumption (E21) |
| Higher aid (F35) | Higher investment (G31) |
| Absorptive capacity (F35) | Effectiveness of aid (F35) |
| Low absorptive capacity (F35) | Need for increased aid over time (F35) |
| Stone-Geary preferences (D11) | Stronger effect of aid on investment and growth (O19) |
| Aid intensity (F35) | Economic growth (O00) |
| Optimal path of aid (F35) | Front-loaded aid when absorptive capacity is high (F35) |