Helping others or helping oneself? International subsidies and the provision of global public goods

This paper explores the welfare effects of international subsidies designed to expedite the production of global public goods. It distinguishes between the impact subsidies exert on behaviour and the impact subsidies exert on welfare. Subsidies that encourage recipients to contribute to the provision of global public goods can be designed to maximize the welfare of donor countries. While these optimal subsidies achieve a Pareto efficient allocation of resources, all the efficiency gains are appropriated by donor countries. If equity is irrelevant, optimal subsidies are higher for high-income recipients than for low-income recipients.