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Are Debt Repayment Incentives Undermined by Foreign Aid?

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Abstract

This paper investigates the effects of inflows of foreign aid on the debt repayment behaviour of developing countries. The paper first delineates the overall incentives to committing to timely repayment in a war of attrition-type model. A set of panel estimates including 93 developing countries shows that foreign aid is strongly negatively associated with repayment incentives. The findings pertain to both total debt service and service on publically guaranteed debt. Only countries that tend to vote predominantly with the US in the UN General Assembly are not significantly discouraged from servicing their debt by inflows of foreign aid.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 10-20.

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Length: 48 pages
Date of creation: 24 Nov 2010
Date of revision:
Handle: RePEc:hhs:aareco:2010_020

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Keywords: Foreign aid; external debt; debt service; political economy;

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Cited by:
  1. Brech, Viktor & Potrafke, Niklas, 2013. "Donor ideology and types of foreign aid," Munich Reprints in Economics 20229, University of Munich, Department of Economics.
  2. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.

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