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Foreign aid, leisure–effort choice, and economic growth

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  • Liu, Xiangbo
  • Zhang, Xiaomeng
  • Chao, Chi-Chur

Abstract

Using an endogenous growth model, this paper examines the growth and welfare effects of foreign aid in the recipient economy. The emphasis is on the incentive factor of the effort–leisure choice. Besides financing public services, part of the aid is transferred to the public. This increases individual wealth, thereby providing less incentives to individuals for human capital acquisition, but with more leisure. Thus, foreign aid may not always help the growth and welfare of the economy. Taking this incentive factor into account, we further study the issue on aid allocation in achieving the highest levels of growth and welfare. Along the balanced growth path, aid allocation for welfare maximization is different from that under growth maximization.

Suggested Citation

  • Liu, Xiangbo & Zhang, Xiaomeng & Chao, Chi-Chur, 2014. "Foreign aid, leisure–effort choice, and economic growth," Economic Modelling, Elsevier, vol. 43(C), pages 435-438.
    • Handle: RePEc:eee:ecmode:v:43:y:2014:i:c:p:435-438
    DOI: 10.1016/j.econmod.2014.09.006
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    References listed on IDEAS

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    1. Hatzipanayotou, Panos & Michael, Michael S., 1995. "Foreign aid and public goods," Journal of Development Economics, Elsevier, vol. 47(2), pages 455-467, August.
    2. Murray C. Kemp, 2005. "Aid Tied To The Donor'S Exports," Pacific Economic Review, Wiley Blackwell, vol. 10(3), pages 317-322, October.
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    5. Chatterjee, Santanu & Sakoulis, Georgios & Turnovsky, Stephen J., 2003. "Unilateral capital transfers, public investment, and economic growth," European Economic Review, Elsevier, vol. 47(6), pages 1077-1103, December.
    6. Lahiri, Sajal & Raimondos-Moller, Pascalis, 1997. "On the tying of aid to tariff reform," Journal of Development Economics, Elsevier, vol. 54(2), pages 479-491, December.
    7. George Economides & Sarantis Kalyvitis & Apostolis Philippopoulos, 2008. "Does foreign aid distort incentives and hurt growth? Theory and evidence from 75 aid-recipient countries," Public Choice, Springer, vol. 134(3), pages 463-488, March.
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    Cited by:

    1. Njangang, Henri & Nembot Ndeffo, Luc & Noubissi Domguia, Edmond & Fosto Koyeu, Prevost, 2018. "The long-run and short-run effects of foreign direct investment, foreign aid and remittances on economic growth in African countries," MPRA Paper 89747, University Library of Munich, Germany.
    2. Kim, Sang-Kee & Kim, Young-Han, 2016. "Is tied aid bad for the recipient countries?," Economic Modelling, Elsevier, vol. 53(C), pages 289-301.

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