Conditionality And Fragility In Long-Term Financial Contracts

Lenders condition future loans on some index of past performance. Typically, banks condition future loans on repayments of earlier obligations while international organizations condition future loans on the implementation of some policy conditions. The authors build an agency model that accounts for these tendencies to offer an explanation for why both types of conditionality clause may coexist. The optimal conditionality clause depends on the likelihood that a borrower who has been denied funds from the original lender can access funds from other sources, what they call 'Fragility'.