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Lending to the Borrower from HellDebt, Taxes, and Default in the Age of Philip II$
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Mauricio Drelichman and Hans-Joachim Voth

Print publication date: 2014

Print ISBN-13: 9780691151496

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691151496.001.0001

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Lending to the Borrower from Hell

Lending to the Borrower from Hell

Chapter:
(p.132) Chapter 5 Lending to the Borrower from Hell
Source:
Lending to the Borrower from Hell
Author(s):

Mauricio Drelichman

Hans-Joachim Voth

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691151496.003.0006

This chapter focuses on repayment incentives. The question of why sovereign lending can exist can be divided into two broad approaches: sanctions and reputation. Papers in the reputation tradition argue that the need to smooth consumption is key: if a borrower fails to honor their contract, credit will dry up. The borrower will be markedly worse off, being unable to borrow in hard times. In contrast, the sanctions literature argues that without penalties above and beyond the mere exclusion from future borrowing, sovereign lending cannot exist. Sanctions range from trade embargoes to military intervention. Over the last 200 years, there are examples of both trade sanctions and armed intervention—but they are exceedingly rare.

Keywords:   repayment incentives, sovereign lending, sanctions, reputation, penalties, trade embargoes, military intervention

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