Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80319
Authors: 
Bougheas, Spiros
Dasgupta, Indraneel
Morrissey, Oliver
Year of Publication: 
2007
Series/Report no.: 
CREDIT Research Paper 07/08
Abstract: 
Lenders condition future loans on some index of past performance. Typically, banks condition future loans on repayments of earlier obligations while international organizations condition future loans on the implementation of some policy conditions. We build an agency model that accounts for these tendencies to offer an explanation for why both types of conditionality clause may coexist. The optimal conditionality clause depends on the likelihood that a borrower who has been denied funds from the original lender can access funds from other sources, what we call ‘fragility’. For conditionality to work it is paramount that when lenders deny future loans borrowers do not have access to alternative sources of funds. When fragility is not a major issue conditional on investment contracts are optimal. In contrast, when fragility is a major concern then conditional on repayment contracts are optimal as they reduce the likelihood of those states where fragility becomes an issue.
Subjects: 
Long-term loans
fragility
conditionality
JEL: 
G21
F34
Document Type: 
Working Paper

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