Chapter 3 Agglomeration and Aid

We combine a key issue in development economics (explaining core-periphery patterns) for the first time with an analysis of unilateral transfers (foreign aid) using a New Economic Geography model. We show that (i) direct transfer paradoxes are not possible in a symmetric setting even if a bystander is present, (ii) the effects of foreign aid depend on the level of economic integration, (iii) aid only has a temporary effect (even if there is a bystander present) if the initial equilibrium is stable, and (iv) the recipient as well as the bystander benefits from foreign aid if the donor is large.