Legal Scholars Advance the Principle of Odious Debts

Partially odious debts? A framework for an optimal liability regime

(March 15, 2007)

Omri Ben-Shahar & G. Mitu Gulati
U of Michigan Law & Economics, Olin Working Paper No. 07-007
Thursday, March 15, 2007
Abstract: This article argues that the cost of odious debt ought to be borne by the party who is best positioned to prevent the accumulation of such debt.

Creditors should bear odious debt liability – be barred from recovering the debt – to the extent that they could have taken measures to reduce the risk of forfeiture or to monitor the use of the money. Such liability would induce better care in funding decisions. At the same time, the magnitude of creditors’ liability should reflect only the true social harm of odious debt. Even despotic regimes direct some of the funds to benefit the populace. Accordingly, creditors’ liability ought to extend only to the fraction of the debt that served odious purposes. Effectively, liability for odious debt would be shared by the creditors and populace, with the relative shares depending on comparative blameworthiness, assessed from an economic, incentive-oriented perspective. After developing this principle, the paper explores ways in which it can be implemented.

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