COMPETITION FOR AID AND TRADE-POLICY

This paper considers the optimal allocation of a given amount of forei gn aid between two recipient countries. It is shown that, given consum er preferences, a country following a more restrictive trade policy wo uld receive a smaller share of the aid if the donor country maximises its own welfare in allocating aid. If, on the other hand, the donor co untry allocates aid in order to maximize the sum of the welfare of the two recipient countries, the result is just the opposite, Finally, we analyze the situation where the recipient countries compete with each other for the given amount of aid. It is shown that this competition tends to lower the level of optimal tariffs in the recipient countries .