Help or forgive? Aid versus debt relief

We show that, if the time preferences of debtor governments and thus their willingness to invest is private information, then a policy that offers the choice between aid or debt relief is preferable to other assistance policies. This is because low discount governments value debt relief more than high discount governments and, by choosing debt relief instead of aid, they convey information about their time preferences. This allows private lenders to distinguish the type of borrower and thus provide funds only to the governments that want to invest