Dokument

Summary:
This paper empirically investigates whether donor countries punish sovereign defaults by reducing foreign aid ows. Our findings reject the hypothesis formulated in the theoretical literature that a default leads to a loss of foreign aid for the defaulting country. Creditor countries directly affected by the default do not reduce their aid disbursements. Hence, foreign aid is not used as a punishment instrument. Neither can it therefore serve as an enforce- ment mechanism for international debt contracts. Furthermore, other donors even raise the amount of development assistance allocated to the delinquent country by about 15% on average. Overall the amount of foreign aid given to the defaulting country increases by 6.4%.

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