Aid Withdrawal as Punishment for Defaulting Sovereigns? An Empirical Analysis

Jana Brandt and Markus Jorra

No 201220, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper empirically investigates whether donor countries punish sovereign defaults by reducing foreign aid ows. Our ndings reject the hypothesis formulated in the theoretical literature that a default leads to a loss of foreign aid for the defaulting country. Creditor countries directly a ected by the default do not reduce their aid disbursements. Hence, foreign aid is not used as a punishment instrument. Neither can it therefore serve as an enforcement mechanism for international debt contracts. Furthermore, other donors even raise the amount of development assistance allocated to the delinquent country by about 15% on average. Overall the amount of foreign aid given to the defaulting country increases by 6.4%.

Keywords: Sovereign defaults; Default costs; Foreign aid; Sanctions (search for similar items in EconPapers)
JEL-codes: C23 C24 F34 F35 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2012
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Citations: View citations in EconPapers (3)

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