Many developing countries are severely in debt to developed countries. Interest on this debt pulls funds away from other projects that could improve social welfare. Activists have lobbied the U.S. government to forgive its loans to poor countries, but some argue that this would create a “moral hazard” problem. Explain why debt forgiveness might create a moral hazard problem. Is this a valid concern?
Many developing countries are severely in debt to developed countries. Interest on this debt pulls funds away from other projects that could improve social welfare. Activists have lobbied the U.S. government to forgive its loans to poor countries, but some argue that this would create a “moral hazard” problem. Explain why debt forgiveness might create a moral hazard problem. Is this a valid concern?
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter20: The Problem Of Adverse Selection Moral Hazard
Section: Chapter Questions
Problem 20.2IP
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Many developing countries are severely in debt to developed countries. Interest on this debt pulls funds away from other projects that could improve social welfare. Activists have lobbied the U.S. government to forgive its loans to poor countries, but some argue that this would create a “moral hazard” problem. Explain why debt forgiveness might create a moral hazard problem. Is this a valid concern?
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