Debt and Aid, War and Peace: Policy Tradeoffs in Conflict-affected Countries

A creditor can balance debt recovery and humanitarian goals within an optimal contract framework. The approach ties together two strands of literature that assume either creditor self-interest (Krugman 1988) or benevolence (Addison and Murshed 2003). A reservation utility for the debtor serves as a metric for creditor benevolence. The optimal hyper-incentive contract recognizes that the attainment of health, education, peace and the appeasement of foreign creditors may be conflicting goals. Forgiving debt to motivate paying creditors may therefore have the unintended effect of reducing effort devoted to winning a civil war. For a given reservation utility for the debtor, aid directly targeted towards ending a civil war is a substitute for debt forgiveness.

Issue Date:
Publication Type:
Journal Article
PURL Identifier:
Published in:
Review of Applied Economics, Volume 02, Number 2
Page range:
Total Pages:
JEL Codes:
F34; F35

 Record created 2017-04-01, last modified 2018-01-22

Download fulltext

Rate this document:

Rate this document:
(Not yet reviewed)