Debt and Aid, War and Peace: Policy Tradeoffs in Conflict-affected Countries
AbstractA creditor can balance debt recovery and humanitarian goals within an optimal contract framework. The approach ties together two strands of literature that assume either creditor self-interest (Krugman 1988) or benevolence (Addison and Murshed 2003). A reservation utility for the debtor serves as a metric for creditor benevolence. The optimal hyper-incentive contract recognizes that the attainment of health, education, peace and the appeasement of foreign creditors may be conflicting goals. Forgiving debt to motivate paying creditors may therefore have the unintended effect of reducing effort devoted to winning a civil war. For a given reservation utility for the debtor, aid directly targeted towards ending a civil war is a substitute for debt forgiveness.
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Bibliographic InfoArticle provided by Review of Applied Economics in its journal Review of Applied Economics.
Volume (Year): 2 (2006)
Issue (Month): 2 ()
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debt overhang; debt forgiveness; optimal contracts; civil war; exports; Financial Economics; F34; F35;
Find related papers by JEL classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F35 - International Economics - - International Finance - - - Foreign Aid
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- Patricia Alvarez-Plata & Tilman Brück, 2006.
"External Debt in Post-Conflict Countries,"
Discussion Papers of DIW Berlin
613, DIW Berlin, German Institute for Economic Research.
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