A key issue in development economics is the explanation of core-periphery patterns around the world. Combining this issue with that of analyzing unilateral transfers (e.g. foreign aid) points in the direction of the use of New Economic Geography (NEG) models which, so far, has not been done...

A key issue in development economics is the explanation of core-periphery patterns around the world. Combining this issue with that of analyzing unilateral transfers (e.g. foreign aid) points in the direction of the use of New Economic Geography (NEG) models which, so far, has not been done...

We constract a two-country trade model of foreign aid. The aid receiving country suffers from Harris-Todaro type of unemployment. Aid is either untied, tied to sector-specific capital, or tied to intersectorally mobile capital. We compare these types of aid by examining their terms-of-trade and...