The Generalized Theory of Transfers and Welfare: Exogenous (Policy-Imposed) and Endogenous (Transfer-Induced) Distortions

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Abstract
This paper reconsiders the welfare effects of a transfer payment in a two-commodity world with two agents (countries), by taking the presence of exogenous and endogenous distortions into account. When there is an exogenous tax-cumsubsidy on production, consumption, or trade, the analysis demonstrates that a transfer may paradoxically enrich the donor and immiserize the recipient under certain specific conditions. These welfare paradoxes are also shown to be possible if the transfer endogenously induces “directly unproductive profit-seeking” activity of lobbyists. Concluding remarks emphasize the paper's relevance for policymakers.