IDEAS home Printed from
   My bibliography  Save this paper

The Mouse that Roars Gets the Cheese: LDC Debt Forgiveness and Political Instability


  • Miles Cahill

    () (Department of Economics, College of the Holy Cross)

  • Paul Isely

    () (Department of Economics, Grand Valley State University)


Traditional models of sovreign debt and default focus on the purely economic costs and benefits of borrowing and default. The model developed in this paper shows that political importance, in the face of possible political instability, is also important when determining the amount of privately funded loan a developing country can command. This paper presents a model where a politically important LDC near the point of political instability is able to extract its full political value to the U.S. by engaging in a loan agreement. This agreement consists of a loan equal to the present value of a stream of payments so large that after payments are made, aid from the U.S. is needed to fund a level of consumption that keeps the LDC politically stable. In this way, the U.S. is induced into funding a portion of the loan. This type of loan is only made to countries who do not have sufficient aggregate production to meet domestic consumption demand, and the size of the loan is proportional to the political importance of the LDC. Further, though the size of the loan is determined by a Rubenstein bargaining process, the impatience of the LDC and bank for making an agreement does not affect the outcome - it is the willingness of the U.S. to provide aid in the case of default that determines the size of the loan.

Suggested Citation

  • Miles Cahill & Paul Isely, 1997. "The Mouse that Roars Gets the Cheese: LDC Debt Forgiveness and Political Instability," Working Papers 9605, College of the Holy Cross, Department of Economics.
  • Handle: RePEc:hcx:wpaper:9605

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    international lending; developing countries; aid;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hcx:wpaper:9605. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.