To Give or to Forgive? Aid Versus Debt Relief

30 Pages Posted: 20 Apr 2016

See all articles by Tito Cordella

Tito Cordella

Johns Hopkins University - Bologna Center; World Bank

Alessandro Missale

University of Milan - Department of Business Policy and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2011

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: Debt Markets, External Debt, Bankruptcy and Resolution of Financial Distress, Banks & Banking Reform, Access to Finance

Suggested Citation

Cordella, Tito and Missale, Alessandro, To Give or to Forgive? Aid Versus Debt Relief (October 1, 2011). World Bank Policy Research Working Paper No. 5859, Available at SSRN: https://ssrn.com/abstract=1950024

Tito Cordella (Contact Author)

Johns Hopkins University - Bologna Center ( email )

Via Belmeloro 11
40126 Bologna
Italy

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-0043 (Phone)

Alessandro Missale

University of Milan - Department of Business Policy and Economics ( email )

Via Conservatorio 7
I-20122 Milano
Italy

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