Dynamics of International Debt Overhang with Two Lender Banks
AbstractThis paper presents a dynamic formalization of the behavior of creditor banks in the presence of the secondary market for debts. We formulate the problem as an infinite horizon game with two banks as players where each bank decides in every period either to sell its loan exposure to the debtor country at the present secondary market price, or to wait and keep its exposure to the next period. We show that there exist three types of subgame perfect equilibria with the property called the time continuation. We consider the relationship between our equilibria and those of the Kaneko-Prokop (1991) one-period approach to the same problem and show that their one-period approach does not lose much of the dynamic nature of the problem. In every equilibrium, each bank waits in every period with high probability, and the probability is close to 1 when the interest rate is small. If the price function of debt is approximated by some homogeneous function for large values of debt, then the central equilibrium probability becomes stationary in the long run. The stationary probability is relatively high as long as the interest rate is low. These results are interpreted as a tendency for the problem of debt overhang to remain almost unchanged.
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Bibliographic InfoArticle provided by Japanese Economic Association in its journal Japanese Economic Review.
Volume (Year): 49 (1998)
Issue (Month): 2 (06)
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Other versions of this item:
- Prokop, J., 1991. "Dynamic of International Debt Overhang with two Lender Banks," Working papers 946, Wisconsin Madison - Social Systems.
- Jacek Prokop, 1991. "Dynamics of International Debt Overhang with Two Lender Banks," Discussion Papers 946, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Open Access publications from Tilburg University
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945, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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- Mamoru Kaneko & Jacek Prokop, 1993.
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Springer, vol. 58(1), pages 1-24, February.
- Mamoru Kaneko & Jacek Prokop, 1991. "A Game Theoretical Approach to the International Debt Overhang," Discussion Papers 945, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Jacek Prokop, 1991.
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949, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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