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Debt forgiveness: the case for hyper-incentive contracts

Abstract:

We review two proposals for debt forgiveness; the Highly Indebted Poor Country Initiative (HIPC) and the Jubilee 2000 Coalition Initiative (J2K). We then consider the workhorse model of debt forgiveness (Krugman 1988). We show that the workhorse model solution is a sub-optimal contract, where the incentive parameter is set without regard to the cost of effort. A fully-optimal debt-overhang contract is derived, with an incentive parameter greater than the marginal social benefit of extra effor...

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Publication status:
Published

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Publisher:
University of Oxford Publisher's website
Series:
Department of Economics Discussion Paper Series
Publication date:
2000-10-01
Paper number:
37
Keywords:
Pubs id:
1144384
Local pid:
pubs:1144384
Deposit date:
2020-12-15

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