Intertemporal Distribution of Foreign Aid

We analyze the dynamic effects of foreign aid on the economic growth and welfare of a recipient countries. Based on an overlapping generations model with a productive capital, foreign aid is characterized by its uses: whether it takes a form of income compensation (income aid) or capital stock (capital aid), and by its recipients: which generation(s) or institution hold(s) its ownership. We found some different results from those of the traditional wisdom of foreign aid. First, foreign aid tends to be less efficient without any condition to the recipient. Second, capital aid can be more efficient than income aid, and its efficiency could be even higher when capital aid is loaned in stead of being granted. Third, a stable relationship between the donors and the recipient may harm the efficiency of foreign aid.