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Debt and Aid, War and Peace: Policy Tradeoffs in Conflict-affected Countries

Listed author(s):
  • Menzies, Gordon Douglas

A 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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File URL: http://purl.umn.edu/50148
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Article provided by Review of Applied Economics in its journal Review of Applied Economics.

Volume (Year): 2 (2006)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:ags:reapec:50148
Contact details of provider: Web page: http://www.lincoln.ac.nz/story11874.html

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  1. Cole, Harold L & Kehoe, Patrick J, 1998. "Models of Sovereign Debt: Partial versus General Reputations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 55-70, February.
  2. Paul Collier & Anke Hoeffler, 2004. "Greed and Grievance in Civil War," Development and Comp Systems 0409007, EconWPA.
  3. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
  4. Hirshleifer, Jack, 1995. "Anarchy and Its Breakdown," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 26-52, February.
  5. Fernandez-Ruiz, Jorge, 1996. "Debt and incentives in a dynamic context," Journal of International Economics, Elsevier, vol. 41(1-2), pages 139-151, August.
  6. Jonathan Eaton, 1991. "Sovereign Debt: A Primer," Boston University - Institute for Economic Development 21, Boston University, Institute for Economic Development.
  7. Menzies, Gordon Douglas, 2004. "First-best debt relief," Economics Letters, Elsevier, vol. 82(3), pages 301-306, March.
  8. Eaton, Jonathan, 1990. "Debt Relief and the International Enforcement of Loan Contracts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 43-56, Winter.
  9. Addison, Tony & Murshed, S. Mansoob, 2001. "Debt Relief and Civil War," WIDER Working Paper Series 057, World Institute for Development Economic Research (UNU-WIDER).
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