The paper develops a model of an IMF-like coinsurance arrangement among member countries. First, it shows that a coinsurance arrangement among countries can, in principle, play a useful role in helping countries bear the risks involved in developing their economies and becoming part of the global financial system. Second, the operation of the coinsurance arrangement is examined under different loan contracts offered by the IMF. The analysis suggests that, if the IMF's objective is to safeguard its resources and be concerned about the welfare of the borrower, an ex ante loan contract (that is a contract agreed to before problems arise) is more likely to create the right incentives - induce higher effort by member countries to avoid and overcome crises - than an ex-post loan contract (that is a contract made after problems arise). Such ex ante contracts highlight the need for precommitment to contend with the Samaritan's dilemma and time inconsistency. It also shows that state-contingent repayment schemes are needed to deal with King Lear's dilemma.
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Paper provided by Bank for International Settlements in its series BIS Working Papers with number
170.
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
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Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1985.
"The Strategic Bequest Motive,"
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[Downloadable!] (restricted)
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Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1986.
"The Strategic Bequest Motive,"
Journal of Labor Economics,
University of Chicago Press, vol. 4(3), pages S151-82, July.
[Downloadable!] (restricted)
Raghuram G. Rajan & Luigi Zingales, 1999.
"The Tyranny of Inequality,"
CRSP working papers
423, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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Cited by: (explanations, 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.)
Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008.
"Sudden Stops and IMF-Supported Programs,"
NBER Chapters,
in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266
National Bureau of Economic Research, Inc.