The Transfer Problem under Uncertainty: The Existence of Pareto-Improving Transfers

Abstract

This paper examines the effect of a unilateral transfer on the welfare of two countries under uncertainty. The traditional welfare effects are summarized and extended for a pure exchange economy with complete contingent claims markets. It is demonstrated that the effects of a transfer in such an economy is isomorphic to the effects in the traditional certainty case where a unilateral transfer always decreases the welfare of the transferor and increases that of the transferee. Further, in the absence of a complete set of markets, examples are exhibited in which a unilateral transfer increases the welfare of both countries.