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The politics of foreign aid

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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 the direct losses. This paper proposes athird answer to the above question, namely that aid is determined through thedomestic political process of the donor country. The paper demonstrates howforeign aid affects the donor country’s income distribution and how, in a directdemocracy, the majority of voters might benefit from foreign aid giving eventhough the country’s social welfare is reduced.JEL Classification: F35Keywords: foreign aid, politics, majority voting.

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Wolfgang Mayer, Pascalis Raimondos-Møller

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