Odious Debt in an Imperfect World

Authors

  • Thorsten Janus

    Corresponding author
    1. University of Wyoming, Department of Economics & Finance, Dept. 3985, 1000 E. University Ave., Laramie, WY 82071, USA
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Janus: University of Wyoming, Department of Economics & Finance, Dept. 3985, 1000 E. University Ave., Laramie, WY 82071, USA. Tel: +1-307-766-3384; Fax: +1-307-766-5090; E-mail: tjanus@uwyo.edu.

Abstract

The odious debt problem refers to a government's ability to borrow for elite consumption while the general population repays. Although an intuitive response is to ban lending to such regimes, this paper shows that if a government faces endogenous replacement risk, then an international odious debt doctrine which (i) decreases the country's debt ceiling; (ii) decreases the likelihood that the citizens must repay the debt; or (iii) increases the government's cost of borrowing for a given default risk can all decrease citizens' welfare. These findings suggest that, even when a regime is clearly odious, allowing it to borrow up to a point may be preferable to a complete lending ban.

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