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Are Debt Repayment Incentives Undermined by Foreign Aid?

Christian Bjørnskov () and Philipp Schröder

No 10-20, Working Papers from University of Aarhus, Aarhus School of Business, Department of Economics

Abstract: This paper investigates the effects of inflows of foreign aid on the debt repayment behaviour of developing countries. The paper first delineates the overall incentives to committing to timely repayment in a war of attrition-type model. A set of panel estimates including 93 developing countries shows that foreign aid is strongly negatively associated with repayment incentives. The findings pertain to both total debt service and service on publically guaranteed debt. Only countries that tend to vote predominantly with the US in the UN General Assembly are not significantly discouraged from servicing their debt by inflows of foreign aid.

Keywords: Foreign aid; external debt; debt service; political economy (search for similar items in EconPapers)
JEL-codes: O15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev
Date: 2010-11-24
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Journal Article: Are debt repayment incentives undermined by foreign aid? (2013) Downloads
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