Cross-border transport infrastructure and aid policies

We investigate resource allocation concerning the provision of cross- border transport infrastructure, which is used for trade of goods between two neighboring countries. Since the level of infrastructure is sub-optimal under the circumstances that two governments choose the levels of infrastructure independently, we focus on the role of foreign aid to improve the efficiency of infrastructure provision. In this paper, we examine the welfare effects of aid policies, and show that aid can make both countries better off, i.e., Pareto improvement. Furthermore, Pareto improvement is more likely if the stage of development in recipient country is very low or sufficiently high.