Promoting Trade Liberalization: Theoretical Analysis of Foreign Aid as Prize |
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Authors: | Malokele Nanivazo Sajal Lahiri |
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Institution: | 1. Department of Economics, University of Kansas, Lawrence, KS;2. Department of Economics, Mailcode 4515, Southern Illinois University, Carbondale, IL, USA |
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Abstract: | We investigate whether foreign aid can be used to induce trade policy reforms. We develop a two‐period political economic model where promise of aid in period 2 depends on chosen tariff in period 1. We consider three scenarios depending on whether the donor is passive/active and whether the two governments move simultaneously or sequentially. We find a sufficient condition for unconditional aid to increase the level of optimal tariff, and the possibility of unconditional aid increasing optimal tariff decreases when the donor is active rather than passive. |
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