TRANSFERS, RETURNS TO SCALE, TIED AID AND MONOPOLISTIC COMPETITION

We examine transfers and tied aid in a model with increasing returns t o scale and monopolistic competition. Transfers give rise to an additi onal (love of variety) welfare effect and affect the utility possibili ty locus. Generic tied aid may exacerbate or reverse these results. Th e popularity of aid tied to specific manufactured goods can be explain ed through rent-seeking behavior since such aid gives rise to profits in the donor country. These profits in turn largely repatriate the tra nsfer such that donors can appear to be more generous than they really are.