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Abstract

This paper investigates the choice of optimal international income transfers when trade policies are decided in a non-cooperative fashion. Three alternative scenarios, depending on the timing of the actions, and on whether the transfer is tied, are analyzed. It is shown that if the transfer is untied, the optimal transfer is zero irrespective of whether the amount of transfer is chosen simultaneously with, before, or after the tariffs. When the donor can tie the transfer to a reduction in the recipient's tariff, the optimal level of the transfer is positive, and the world achieves a Pareto-efficient equilibrium.


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