Forgive or buy back: an experimental study of debt relief
AbstractA large share of the debt claims owed by the worldâs poorest countries has been cancelled through the HIPC (highly indebted poor countries) debt relief initiative. It is believed that, with less debt burden, the HIPC will be able to devote more resources to investment and thus promote their own growth and benefit their creditors in the long run. But does debt forgiveness really provide the best incentive for those countries who suffers from debt overhang? In this paper, we adopt experimental methods to study the impact of two different schemes for relieving debt. The two schemes we consider here are debt forgiveness and debt buyback, with the latter being more market-based since it allows indebted countries to repurchase their own debt on the secondary market at a discount. We find that creditors tend to reduce more debt when the relief takes the form of debt forgiveness than that of buyback. Debtors under the scheme of forgiveness are not significantly more reciprocal than those of buyback. After controlling for the amount of debt relief, creditors are significantly worse off under forgiveness whereas debtors are indifferent between the two schemes. Overall, debt forgiveness yields less desirable outcomes than debt buybacks.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Springer in its journal Review of Economic Design.
Volume (Year): 14 (2010)
Issue (Month): 3 (September)
Contact details of provider:
Web page: http://link.springer.de/link/service/journals/10058/index.htm
Other versions of this item:
- Vivian Lei & Steven Tucker & Filip Vesely, 2007. "Forgive or Buy Back: An Experimental Study of Debt Relief," Labsi Experimental Economics Laboratory University of Siena 017, University of Siena.
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
- Krugman, Paul, 1988.
"Financing vs. forgiving a debt overhang,"
Journal of Development Economics,
Elsevier, vol. 29(3), pages 253-268, November.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
- Savvides, Andreas, 1992. "Investment Slowdown in Developing Countries during the 1980s: Debt Overhang or Foreign Capital Inflows?," Kyklos, Wiley Blackwell, vol. 45(3), pages 363-78.
- Andrew M. Warner, 1991.
"Did the debt crisis cause the investment crisis?,"
International Finance Discussion Papers
418, Board of Governors of the Federal Reserve System (U.S.).
- Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).
If references are entirely missing, you can add them using this form.