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type:text, This paper shows that a unilateral transfer payment may paradoxically increase or decrease the paying country's welfare in the presence of a factor market distortion with stability conditions satisfied in a two country general equilibrium trade model. Our extension of the standard two country trade model reveals that a unilateral transfer in the presence of a domestic factor market distortion imposes an allocation effect on the domestic economy such that paradoxical welfare change may emerge when changes in the paying country's terms of trade interact with the distortion. The policy implication of our analysis suggests that the bias of the domestic factor market distortion and the direction in which the country's terms of trade change must be considered when a country is considering making a transfer to another country.

Tokyo, This paper shows that a unilateral transfer payment may paradoxically increase or decrease the paying country's welfare in the presence of a factor market distortion with stability conditions satisfied in a two country general equilibrium trade model. Our extension of the standard two country trade model reveals that a unilateral transfer in the presence of a domestic factor market distortion imposes an allocation effect on the domestic economy such that paradoxical welfare change may emerge when changes in the paying country's terms of trade interact with the distortion. The policy implication of our analysis suggests that the bias of the domestic factor market distortion and the direction in which the country's terms of trade change must be considered when a country is considering making a transfer to another country.