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The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World

Bhagwati, Jagdish N.; Brecher, Richard A.; Hatta, Tatsuo

Develops the basic analysis of transfers when there are two economic agents (countries) engaged in the transfer process, but there is an added agent outside the transfer process so that there is bilateral transfer in a multilateral context. Conditions are established for immiserization of the recipient, for enrichment of the donor, and for the 'double perversity' when these two paradoxical outcomes arise simultaneously. Economically intuitive explanations of these results are derived in alternative ways. In Section II, further intuition on these results is arrived at, and suitable geometry of the three-agent transfer problem is simultaneously developed. Importantly, the role of inferiority in consumption or inelastic foreign demand is established in making feasible the perverse outcomes, which are shown to involve a foreign distortion.



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American Economic Review

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January 30, 2013