Sumru Altug () (University of York, Heslington, York YO10 5DD, UK, and Centre for Economic Policy Research, London EC1V 7RR, UK) Sule Ozler () (UCLA, 2263 Bunche Hall, 405 Hilgard Avenue, Los Angeles, CA 90095-1447, USA) Murat Usman () (Koc University, Rumeli Feneri Yolu, Sariyer 80910, Istanbul, TURKEY)
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A sovereign borrower seeks to raise funds internationally to finance a fixed-size project, which no single lender can finance alone. Lenders cannot lend more than their endowments, which are private information. A coordination failure arises; therefore, some socially desirable projects may not be financed, even if ex post feasible. There are multiple equilibria, and a conflict exists between lenders about which equilibrium to coordinate on. When endowments are volatile, some lenders prefer an equilibrium in which the project is financed with probability $p < 1$, even if ex post feasible. The government eliminates such equilibria by offering a sufficiently high return, only if endowment volatility is small.
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Article provided by Springer in its journal Economic Theory.
Find related papers by JEL classification: F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements F34 - International Economics - - International Finance - - - International Lending and Debt Problems