Are Debt Repayment Incentives Undermined by Foreign Aid?

Bjørnskov, Christian; Schröder, Philipp J. H.

doi:10.2139/ssrn.1661894

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Are Debt Repayment Incentives Undermined by Foreign Aid?

41 Pages Posted: 21 Aug 2010

See all articles by Christian Bjørnskov

Christian Bjørnskov

Aarhus University - Department of Economics and Business; Research Institute of Industrial Economics (IFN); Center for Political Studies; Institute for Corruption Studies

Philipp J. H. Schröder

Aarhus University - School of Business and Social Sciences

Date Written: August 19, 2010

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 Classification: O15

Suggested Citation: Suggested Citation

Bjørnskov, Christian and Schröder, Philipp J. H., Are Debt Repayment Incentives Undermined by Foreign Aid? (August 19, 2010). Available at SSRN: https://ssrn.com/abstract=1661894 or http://dx.doi.org/10.2139/ssrn.1661894