The Transfer Paradox in a One-Sector Overlapping Generations Model

No 159, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: This paper examines the effects of international income transfers on welfare and capital accumulation in a one-sector overlapping generations model. It is shown that a strong form of the transfer paradox-- in which the donor country experiences a welfare gain while the recipient country experiences a welfare loss—may occur both in and out of steady state. In addition, it is shown that a weak form of the transfer paradox—where either the donor or recipient (but not both) experience paradoxical welfare effects—may characterize all segments of the transition path not already characterized by the strong transfer paradox. The results are explained by the effects of transfers on world capital accumulation and the world interest rate, which imply secondary intertemporal welfare effects large enough to dominate the initial effects of the income transfer.

Keywords: Transfer problem; transfer paradox; dynamics; one-sector overlapping generations model (search for similar items in EconPapers)
JEL-codes: F11 F35 F43 O19 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-sea
Date: Written 2007-08
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Journal Article: The transfer paradox in a one-sector overlapping generations model (2008)
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