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The scope for collusive behavior among debtor countries

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  • Fernandez, Raquel
  • Glazer, Jacob

Abstract

We study the question of whether there exist strategies whereby countries are able to sustain a cartel or collusive behavior when bargaining with a bank over the amount of debt to be repaid. We show that despite the existence of economies to scale in bargaining--if commitment were possible the countries would benefit from joint bargaining--a debtors' cartel will not emerge in equilibrium (in the absence of credible commitment mechanisms). A unique subgame-perfect equilibrium exists in which the bank is effectively able to isolate each country and extract from each the same payoff that it would obtain in the absence of economies to scale. Consequently, a country would be better off if another country declared default. We also show that if two countries of unequal size are bargaining with a bank, in equilibrium a decrease in the size of the smaller country implies a greater payoff to the large country although the payoff to the small country is invariant.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 32 (1990)
Issue (Month): 2 (April)
Pages: 297-313

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Handle: RePEc:eee:deveco:v:32:y:1990:i:2:p:297-313

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Web page: http://www.elsevier.com/locate/devec

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References

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  1. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  2. Jeffrey Sachs, 1983. "Theoretical Issues in International Borrowing," NBER Working Papers 1189, National Bureau of Economic Research, Inc.
  3. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  4. Raquel Fernandez & Robert W. Rosenthal, 1988. "Sovereign-debt Renegotiations: A Strategic Analysis," NBER Working Papers 2597, National Bureau of Economic Research, Inc.
  5. Raquel Fernandez & David Kaaret, 1988. "Bank Size, Reputation, and Debt Renegotiation," NBER Working Papers 2704, National Bureau of Economic Research, Inc.
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Cited by:
  1. Basu, Kaushik & Morita, Hodaka, 2001. "International Credit and Welfare: Some Paradoxical Results with Implications for the Organization of International Lending," Working Papers 01-05, Cornell University, Center for Analytic Economics.
  2. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  3. Marcel Fafchamps, . "Sovereign Debt, Structural Adjustment and Conditionality," Working Papers 96015, Stanford University, Department of Economics.
  4. Basu, Kaushik & Morita, Hodaka, 2006. "International credit and welfare: A paradoxical theorem and its policy implications," European Economic Review, Elsevier, vol. 50(6), pages 1507-1528, August.

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