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To give or to forgive ? aid versus debt relief

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  • Cordella, Tito
  • Missaley, Alessandro

Abstract

Is generalized debt relief an effective development strategy, or should assistance be tailored to countries'characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5859.

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Date of creation: 01 Oct 2011
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Handle: RePEc:wbk:wbrwps:5859

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Keywords: Debt Markets; External Debt; Bankruptcy and Resolution of Financial Distress; Banks&Banking Reform; Access to Finance;

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  25. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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