Debt Relief for Poor Countries: Conditionality and Effectiveness

Almuth Scholl

No 2013-23, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: This paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries. We develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract. Our findings suggest that incentive-compatible conditions substantially promote fiscal reform and investment in the short- and long-run. In contrast to the recent practice of fully canceling multilateral debt, optimal debt relief is characterized by a combination of outright grants and subsidized loans. Losing loans as a policy instrument reduces welfare considerably.

Keywords: neoclassical growth; conditionality; limited enforceable dynamic contracts; foreign aid (search for similar items in EconPapers)
JEL-codes: F34 F35 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-10-29
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Debt Relief for Poor Countries: Conditionality and Effectiveness (2018)
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