Dynamic Aid Allocation

47 Pages Posted: 13 Aug 2013

See all articles by Paddy Carter

Paddy Carter

University of Bristol

Fabien Postel-Vinay

University of Bristol; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; Centre for Structural Econometrics (CSE)

Jonathan R.W. Temple

Centre for Economic Policy Research (CEPR)

Date Written: August 2013

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 Classification: F35, O41

Suggested Citation

Carter, Paddy and Postel-Vinay, Fabien and Temple, Jonathan R.W., Dynamic Aid Allocation (August 2013). CEPR Discussion Paper No. DP9596. Available at SSRN: https://ssrn.com/abstract=2309240

Paddy Carter (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Fabien Postel-Vinay

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Structural Econometrics (CSE) ( email )

Department of Economics, University of Bristol
8 Woodland Road
Bristol, BS8 1TN
United Kingdom

Jonathan R.W. Temple

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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