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

Miles Cahill () and Paul Isely
Additional contact information
Miles Cahill: Department of Economics, College of the Holy Cross

No 9605, Working Papers from College of the Holy Cross, Department of Economics

Abstract: 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.

Keywords: international lending; developing countries; aid (search for similar items in EconPapers)
JEL-codes: F34 (search for similar items in EconPapers)
Pages: 7 pages
Date: 1996-12
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hcx:wpaper:9605

Access Statistics for this paper

More papers in Working Papers from College of the Holy Cross, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Victor Matheson ().