To give or to forgive? Aid versus debt relief

Tito Cordella and Alessandro Missale

Journal of International Money and Finance, 2013, vol. 37, issue C, 504-528

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.

Keywords: Aid; Debt relief; Aid effectiveness; Signaling (search for similar items in EconPapers)
JEL-codes: D82 F35 H63 O19 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:37:y:2013:i:c:p:504-528

DOI: 10.1016/j.jimonfin.2013.07.002

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