When countries compete for the location of a new multinational plant they need to be aware of the profit shifting opportunities this new plant creates for the global multinational firm. By modelling explicitly the multinational’s intra-firm transactions, we show that the home market advantage...

This paper demonstrates that under conditions of imperfect (oligopolistic) competition, a transition from separate accounting (SA) to formula apportionment (FA) does not eliminate the problem of profit shifting via transfer pricing. In particular, if affiliates of a multinational firm face...

The paper studies the welfare implications of temporary foreign aid in the context of a simple two-country model of trade. In addition to its usual effects, a transfer of income in one period is assumed to influence the preferences of the recipient country in the following period. The implied...

We develop a political-economic model of aid fungibility: a part of aid is diverted away from its intended target by lobby groups. The size of this diversion - the degree of aid fungibility - is determined endogenously by the recipient government. The donor can affect the equilibrium degree of...

Why do donor countries give foreign aid? The answers found in the literature are: (i) because donor countries care for recipient countries (e.g. altruism), and/or (ii) because there exist distortions that make the indirect gains from foreign aid (e.g. terms of trade effects) to be larger than...

We develop a political-economic model of foreign aid allocation. Each ethnic group in the donor country lobbies the government for allocating more aid to its country of origin, and the government accepts contributions from lobby groups. Initial per-capita income of the recipients and those of...

The paper presents a model where the median voter in the donor country determines the support of foreign aid. It is first established that an individual in the donor country is affected by the direct benefits (due to altruism) and costs (due to taxes) of giving aid, and by the indirect benefits...