Advanced Search
MyIDEAS: Login to save this article or follow this journal

Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment

Contents:

Author Info

  • Rohan Pitchford
  • Mark L. J. Wright

Abstract

Why is it difficult to restructure sovereign debt in a timely manner? In this paper, we present a theory of the sovereign debt-restructuring process in which delay arises as individual creditors hold up a settlement in order to extract greater payments from the sovereign. We then use the theory to analyse recent policy proposals aimed at ensuring equal repayment of creditor claims. Strikingly, we show that such collective action policies may increase delay by encouraging free riding on negotiation costs, even while preventing hold-up and reducing total negotiation costs. A calibrated version of the model can account for observed delays and finds that free riding is quantitatively relevant: whereas in simple low-cost debt-restructuring operations, collective mechanisms will reduce delay by more than 60%, in high-cost complicated restructurings, the adoption of such mechanisms results in a doubling of delay. Copyright 2012, Oxford University Press.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://hdl.handle.net/10.1093/restud/rdr038
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 2 ()
Pages: 812-837

as in new window
Handle: RePEc:oup:restud:v:79:y:2012:i:2:p:812-837

Contact details of provider:

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Imperfect competition and quality signalling," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 39(1), pages 163-183.
  2. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring," IMF Working Papers, International Monetary Fund 03/134, International Monetary Fund.
  3. Eichengreen, Barry & Mody, Ashoka, 2000. "Would Collective Action Clauses Raise Borrowing Costs? An Update and Additional Results," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt46p4z4c4, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. Jose Wynne & Federico Weinschelbaum, 2004. "Renegotiation, Collective Action Clauses and Sovereign Debt Markets," 2004 Meeting Papers, Society for Economic Dynamics 7, Society for Economic Dynamics.
  5. Yeon-Koo Che & Kathryn E. Spier, 2007. "Exploiting Plaintiffs Through Settlement: Divide and Conquer," Discussion Papers, Columbia University, Department of Economics 0607-18, Columbia University, Department of Economics.
  6. Flavio Menezes & Rohan Pitchford, 2004. "A model of seller holdout," Economic Theory, Springer, Springer, vol. 24(2), pages 231-253, August.
  7. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, Elsevier, vol. 80(2), pages 176-187, March.
  8. Broner, Fernando A & Martin, Alberto & Ventura, Jaume, 2007. "Sovereign Risk and Secondary Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6055, C.E.P.R. Discussion Papers.
  9. Grossman, Sanford J. & Perry, Motty, 1986. "Sequential bargaining under asymmetric information," Journal of Economic Theory, Elsevier, Elsevier, vol. 39(1), pages 120-154, June.
  10. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Economic Theories of Settlement Bargaining," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0508, Vanderbilt University Department of Economics.
  11. Ghosal, Sayantan; Thampanishvong, Kannika, 2010. "Does strengthening Collective Action Clauses (CACs) help?," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 29, Competitive Advantage in the Global Economy (CAGE).
  12. Bolton, Patrick & Jeanne, Olivier, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4901, C.E.P.R. Discussion Papers.
  13. Cohen, D. & Verdier, T., 1991. "Secret "Buybacks" of LDC Debt," DELTA Working Papers, DELTA (Ecole normale supérieure) 91-18, DELTA (Ecole normale supérieure).
  14. Kenneth Rogoff & Jeromin Zettelmeyer, 2002. "Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 49(3), pages 8.
  15. Hendricks, Kenneth & Weiss, Andrew & Wilson, Charles, 1987. "The War of Attrition in Continuous Time with Complete Information," Working Papers, C.V. Starr Center for Applied Economics, New York University 87-03, C.V. Starr Center for Applied Economics, New York University.
  16. Jeromin Zettelmeyer & Kenneth Rogoff, 2002. "Bankruptcy Procedures for Sovereigns," IMF Working Papers, International Monetary Fund 02/133, International Monetary Fund.
  17. Porzecanski, Arturo C., 2010. "When Bad Things Happen to Good Sovereign Debt Contracts: The Case of Ecuador," MPRA Paper 20857, University Library of Munich, Germany.
  18. Andrew G Haldane & Adrian Penalver & Victoria Saporta & Hyun Song Shin, 2005. "Optimal collective action clause thresholds," Bank of England working papers, Bank of England 249, Bank of England.
  19. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 93-108, January.
  20. Spier, Kathryn E, 2003. " The Use of "Most-Favored-Nation" Clauses in Settlement of Litigation," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 34(1), pages 78-95, Spring.
  21. Mark L. J. Wright, 2005. "Coordinating Creditors," American Economic Review, American Economic Association, American Economic Association, vol. 95(2), pages 388-392, May.
  22. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  23. Gaston Gelos & Guido Sandleris & Ratna Sahay, 2004. "Sovereign Borrowing by Developing Countries," IMF Working Papers, International Monetary Fund 04/221, International Monetary Fund.
  24. Mark L. J. Wright & Rohan Pitchford, 2008. "Restructuring the Sovereign Debt Restructuring Mechanism," 2008 Meeting Papers, Society for Economic Dynamics 147, Society for Economic Dynamics.
  25. Federico Sturzenegger & Jeromin Zettelmeyer, 2007. "Debt Defaults and Lessons from a Decade of Crises," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262195534, December.
  26. Barry Eichengreen & Ashoka Mody, 2004. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(495), pages 247-264, 04.
  27. Becker, Torbjorn & Richards, Anthony & Thaicharoen, Yunyong, 2003. "Bond restructuring and moral hazard: are collective action clauses costly?," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 127-161, October.
  28. Kapur, Sandeep, 1995. "Markov perfect equilibria in an N-player war of attrition," Economics Letters, Elsevier, Elsevier, vol. 47(2), pages 149-154, February.
  29. David Benjamin & Mark L. J. Wright, 2009. "Recovery Before Redemption: A Theory Of Delays In Sovereign Debt Renegotiations," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  30. David Benjamin, 2008. "Recovery Before Redemption," 2008 Meeting Papers, Society for Economic Dynamics 531, Society for Economic Dynamics.
  31. Rui Pedro Esteves, 2007. "Quis custodiet quem? Sovereign Debt and Bondholders` Protection Before 1914," Economics Series Working Papers, University of Oxford, Department of Economics 323, University of Oxford, Department of Economics.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ugo Panizza, 2013. "Do We Need a Mechanism for Solving Sovereign Debt Crises? A Rule-Based Discussion," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 03-2013, Economics Section, The Graduate Institute of International Studies.
  2. Jeromin Zettelmeyer & Marcos Chamon & Ran Bi, 2011. "The Problem that Wasn't," IMF Working Papers, International Monetary Fund 11/265, International Monetary Fund.
  3. Das, Udaibir S. & Papaioannou, Michael G. & Trebesch, Christoph, . "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," Chapters in Economics, University of Munich, Department of Economics, University of Munich, Department of Economics.
  4. Michael Tomz & Mark L. J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2013-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers, International Monetary Fund 12/203, International Monetary Fund.
  6. Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-100, Scottish Institute for Research in Economics (SIRE).
  7. Ignacio Presno & Demian Pouzo, 2012. "Sovereign Default Risk and Uncertainty Premia," 2012 Meeting Papers, Society for Economic Dynamics 608, Society for Economic Dynamics.
  8. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 29(4), pages 649-667, WINTER.
  9. Bai, Yan & Zhang, Jing, 2012. "Duration of sovereign debt renegotiation," Journal of International Economics, Elsevier, Elsevier, vol. 86(2), pages 252-268.
  10. Demian Pouzo & Ignacio Presno, 2012. "Sovereign default risk and uncertainty premia," Working Papers, Federal Reserve Bank of Boston 12-11, Federal Reserve Bank of Boston.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:oup:restud:v:79:y:2012:i:2:p:812-837. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.