This paper contributes to the literature on foreign aid by exclusively explaining a donors motivation for foreign external assistance. The underlying framework focuses on recipients™ needs for foreign aid to address income inequality as and when growth occurs. A tax-subsidy policy is hypothesized in the manner advocated by optimal tax theory to effectively deal with inequity by minimizing the distortionary effects of income taxes. This framework is ultimately endogeneized in the recipients budget constraint, from which the donor derives the demand for foreign assistance. The outcome supports an inverted-U relationship between foreign aid and per capita income in the way postulated by the conventional Kuznets curve. Our postulate is empirically tested using a panel of 29 developing countries across a time span of 27 years; and from which the hypothesis of an Aid-Kuznets curve could not be rejected.
S. K. Sobhee and NATH, S. H. Y. A. M., “Aid, income inequality and growth: Looking for an aid Kuznets curve ”, Review of Applied Economics , vol. 3, pp. 157-167, 2007.