Question

Do you favor debt forgiveness to all DVCs typically, just the process ones, or none at all? What incentives problem might debt relief create? Would you be willing to pay \(20 a year more in personal income taxes for debt forgiveness? How about \)200? How about $2000?

Short answer

Debt forgiveness as aprocess can be accepted but to a certain amount only as it creates a moral hazard problem. That is, the DVCs will start expecting that if the loan is forgiven today, it maybe forgiven in the future as well, which will cause a low incentive for DVCs to run after the debt.

Step-by-step solution

Debt forgiveness and moral hazards

An IAC may forgive the debt of the DVC in order to help them grow and develop. However, it might create the economic problem of moral hazards as it will build an expectation for DVCs that IACs may forgive all their loans. This will kill the enthusiasm of DVCs to work hard to pay the loan off.

Debt forgiveness should be limited

The IACs must forgive the debt of the IACs to a certain extent only as if they keep forgiving without a limit, they will have to face the burden of it.The citizens may be willing to pay $20 years more in personal taxes just to cover the amount gone in debt forgiveness, but anything more than that, say $200 or $2000, will definitely not be paid by them.