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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.

Suggested Citation

  • Cordella, Tito & Missaley, Alessandro, 2011. "To give or to forgive ? aid versus debt relief," Policy Research Working Paper Series 5859, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5859
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    References listed on IDEAS

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    1. Huanhuan Zheng & Chen Li, 2022. "Can money buy friendship?—Evidence from the US and China’s competition for influence through foreign aid," The World Economy, Wiley Blackwell, vol. 45(10), pages 3224-3245, October.

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    More about this item

    Keywords

    Debt Markets; External Debt; Bankruptcy and Resolution of Financial Distress; Banks&Banking Reform; Access to Finance;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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