Possibility of foreign aid in exchange, Public Economics

This question considers the possibility of foreign aid in exchange for favors. Suppose nation A has RA resources in its treasury and nation B has RB resources. The winning coalition in each nation is WA and WB respectively. Leaders want to survive in office and in order to do so maximize the benefits of their coalition members. Absent any aid transfers, in order to keep their coalition members as happy as possible, the leaders of each nation give each member of the coalition an equal share of the available resources.

a) How much does each coalition member receive? Now suppose the citizens of nation A do not like the policy of religious tolerance in nation B. If nation B ends its policy of tolerance then the citizens in nation B will each experience a loss of benefits worth qB, while the citizens in nation A would all receive the benefits worth qA from the ending of tolerance. Consider aid-for-favors. Suppose nation A offers nation B r resources if it will switch its tolerance policy. a) Write an expression for the minimum amount of aid that A must give B in order to achieve the policy change.

 b) How does nation A's winning coalition size affect the willingness of the leader in A to pay sufficient aid to achieve the aid-for-favors deal? Write an expression to describe this coalition size.

 c) Discuss the implications of the model for who gives aid to whom and how much.

d) Consider the welfare of those inside and those outside the winning coalition in each nation and describe whether the aid-for-favors deal makes them better or worse off.

Posted Date: 2/23/2013 8:24:36 AM | Location : United States







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