Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 10-20: Are Debt Repayment Incentives Undermined by Foreign Aid?

Christian Bjørnskov () and Philipp J.H. Schröder ()
Additional contact information
Christian Bjørnskov: Department of Economics, Aarhus School of Business, Postal: Department of Economics, Frichshuset Hermodsvej 22, 8230 Åbyhøj, Denmark
Philipp J.H. Schröder: Department of Economics, Aarhus School of Business, Postal: Department of Economics, Frichshuset Hermodsvej 22, 8230 Åbyhøj, Denmark

Abstract: This paper investigates the effects of inflows of foreign aid on the debt repayment behaviour of developing countries. The paper first delineates the overall incentives to committing to timely repayment in a war of attrition-type model. A set of panel estimates including 93 developing countries shows that foreign aid is strongly negatively associated with repayment incentives. The findings pertain to both total debt service and service on publically guaranteed debt. Only countries that tend to vote predominantly with the US in the UN General Assembly are not significantly discouraged from servicing their debt by inflows of foreign aid.

Keywords: Foreign aid; external debt; debt service; political economy

JEL-codes: O15

48 pages, November 24, 2010

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10-20_chbjpsc.pdf PDF-file

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