Cordella, TitoMissale, Alessandro2012-03-192012-03-192011-10-01https://hdl.handle.net/10986/3625Is generalized debt relief an effective development strategy, or should assistance be tailored to countries' characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.CC BY 3.0 IGOABSORPTIVE CAPACITYACCOUNTINGALLOCATION OF CREDITAMOUNT OF CREDITAMOUNT OF DEBTAMOUNT OF LOANSARREARSASYMMETRIC INFORMATIONAVERAGE DEBTBANK CREDITBANK FOR INTERNATIONAL SETTLEMENTSBANK POLICYBOND MARKETSBOND YIELDBONDSBORROWING CAPACITYBORROWING COSTSCAPITAL MARKETCAPITAL MARKETSCASE OF DEFAULTCLAIMCOMMERCIAL BANKSCOMMERCIAL DEBTCOST OF DEBTCREDIT CONSTRAINTCREDIT HISTORYCREDITORCREDITORSCREDITWORTHINESSCREDITWORTHY BORROWERCURRENCYCURRENT COSTSDEBTDEBT CRISISDEBT FORGIVENESSDEBT LEVELSDEBT OBLIGATIONSDEBT OVERHANGDEBT RATIOSDEBT REDUCTIONDEBT RELIEFDEBT RELIEF INITIATIVEDEBT RELIEF INITIATIVESDEBT SERVICEDEBT SERVICE PAYMENTSDEBT SUSTAINABILITYDEBT-RELIEFDEBTORDEBTOR COUNTRIESDEBTOR GOVERNMENTDEBTORSDEBTSDEFAULT COSTSDEFAULT RISKDEFAULTERSDEFAULTSDEMAND FOR CREDITDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPMENT ASSISTANCEDISBURSEMENTSDISCOUNT RATESDOLLAR BONDSDOMESTIC DEBTECONOMIC ACTIVITYEQUALITYEUROBONDEXPENDITUREEXTERNAL DEBTEXTERNAL RESOURCESFINANCIAL MARKETSFOREIGN AIDFOREIGN CAPITALFOREIGN CLAIMSFOREIGN CURRENCIESFOREIGN INVESTMENTFOREIGN INVESTORSFUNGIBLEFUTURE DEBTGLOBAL BONDGLOBAL DEVELOPMENT FINANCEHIGH DEBTSHIGH INTEREST RATESHIGHLY INDEBTED COUNTRIESIMPACT OF DEBTINDEBTEDINDEBTED COUNTRIESINDEBTED COUNTRYINDEBTED POOR COUNTRIESINDEBTEDNESSINSTITUTIONAL REFORMINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MARKETSINTERNATIONAL FINANCEINTERNATIONAL LENDINGINTERNATIONAL SETTLEMENTINTERNATIONAL SETTLEMENTSINVESTINGINVESTMENT CHOICESINVESTMENT DECISIONINVESTMENT DECISIONSINVESTMENT OPPORTUNITIESINVESTMENT PROJECTSLACK OF CAPITALLENDERSLOANLOAN VOLUMESLONDON CLUBLONG-TERM BORROWINGLONG-TERM LOANSMARKET ACCESSMARKET VALUEMATURITYMONETARY FUNDMORAL HAZARDMULTILATERAL DEBTMULTILATERAL DEBT RELIEFMULTINATIONALNEW CREDITOLD CREDITORSOLD DEBTOUTPUT LOSSOUTSTANDING DEBTPAST DEBTPOLITICAL ECONOMYPOOL OF BORROWERSPRESENT VALUEPRESENT VALUE OF DEBTPRIVATE BORROWINGPRIVATE CAPITALPRIVATE CAPITAL INFLOWSPRIVATE CREDITPRIVATE CREDITORSPRIVATE DEBTPRIVATE FUNDSPRIVATE LENDERSPRIVATE LENDINGPRIVATE LOANSPRODUCTIVE INVESTMENTPUBLIC CREDITPUBLIC FINANCEPUBLIC INVESTMENTRECIPIENT COUNTRIESRECIPIENT COUNTRYRECOVERY RATEREMAINING DEBTRENEGOTIATIONREPAYMENTRETURNRETURN ON INVESTMENTRETURNSRISK NEUTRALRISK-FREE RATESAVINGSSERIAL DEFAULTERSSTOCK OF DEBTSUBSIDIARIESTHIRD WORLD DEBTTREASURIESTREASURYTREASURY BILLSVALUE OF DEBTYIELD SPREADYIELD SPREADSWorld Bankhttps://doi.org/10.1596/1813-9450-5859