The study of U.S. arms transfers and their impact on the fiscal decisions of aid recipients has been the subject of various interpretations and competing explanations. Absent in this literature has been a systematic testing of propositions derived from a general theory of aid impacts. A larger and somewhat related body of research has examined the political (Chaudhuri 1972; Hughes 1967; Gutteridge 1967) and general economic effects of domestic military spending (Deger and Smith 1983; Smith 1977, 1980; Benoit 1978; Kennedy 1974; Whynes 1979). These studies, however, have not examined the fiscal impact of foreign military assistance. To date only a few researchers have studied this issue in any systematic fashion (McGuire 1979, 1982; Wolf 1971). In this study we seek to fill this gap by applying grant economics theory (Pigou 1932; Oates 1972) to study the fiscal impact of U.S. military arms transfers on foreign nations. Drawing on the domestic aid literature (Oates 1972; Gramlich 1972), we identify a set of propositions concerning the expenditure decisions of domestic aid recipients, and test these propositions against the fiscal behavior of Military Assistance Program (MAP) recipients between 1967-1976. In addition to the substantive import of this question and its bearing on the implementation of U.S. foreign policy, this research provides a unique opportunity to test the applicability of domestic aid theory to the study of foreign aid policy.