Optimal foreign aid and tariffs

This paper investigates the optimal choice of foreign aid when trade polici es are decided in a non-cooperative fashion. Three alternative scenarios, d epending on the timing of the actions and on whether aid is tied, are analy zed. It is shown that, in the case where aid is decided before tariffs, unt ied aid can lead to the reduction of the recipient's optimal trade tax. Whe n the donor can tic the aid to a reduction in the recipient's tariff, the o ptimal aid level is always positive and the world can always achieve a Pare to-efficient equilibrium. (C) 2002 Published by Elsevier Science B.V.