Year: 1996
Type: article
Abstract: The lack of a proper enforcement mechanism for sovereign debt generates a commitment failure. As a result, a sovereign may seek to improve its position in debt renegotiations and thus evade its debt obligations by reducing exports. Conditionality seeks to provide a solution to the incentive problem by addressing the commitment failure. Formalizing this argument, we show that conditionality helps the repayment of sovereign debt. In certain circumstances, it can eliminate debt overhang, especially when it is coupled with concessionary lending of sufficient magnitude. It is, however, unable to restore first best. When it is anticipated by lenders, conditionality may get international financial institutions and sovereign debtors into a trap where the debt overhang persist, debt rescheduling takes place periodically, and conditionality continues indefinitely.
Source: Journal of Development Economics
Author: Marcel Fafchamps
Institution: Stanford University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $4,590
Funder: University of Chicago
OpenAlex ID: W2164668773