Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/37260 
Authors: 
Year of Publication: 
2010
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Effectiveness of Foreign Aid No. B19-V3
Publisher: 
Verein für Socialpolitik, Frankfurt a. M.
Abstract: 
This paper analyzes the effectiveness of debt relief and foreign aid in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. Conditionality is modeled as a dynamic contract that is enforceable only by the threat of aid sanctions. Quantitative results show that debt relief and unconditional foreign aid have no long-run effects since the recipient government accumulates new loans. In contrast, debt relief in combination with conditional foreign aid is effective in promoting growth and reducing poverty. However, debt relief may be counter-productive since they make the punishment threat less severe such that self-enforcing aid contracts are characterized by weak conditionality.
Subjects: 
debt relief
foreign aid
conditionality
limited enforceability
dynamic contracts
neoclassical growth
JEL: 
F35
O11
O19
Document Type: 
Conference Paper

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