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Defaults and Interest Rates in International Lending

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Author Info
Bhagwan Chowdhry (Anderson School of Management)
Abstract

Since lenders cannot observe the riskiness of the projects borrowers could choose, interest rates alone cannot be used as an instrument to discipline the borrowers. A credible threat to exclude borrowers who default more than a certain number of times from participating in the capital markets makes international debt contracts incentive compatible. Larger borrowers, since they get fewer chances to default, choose safer proejcts and are therefore charged smaller interest rates. Also, borrowers, after each successive default swtich to safer and safer projects which may result in smaller and smaller interest rates. This paper provides empirical evidence supporting these two predictions.

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1170&context=anderson/fin
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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1170.

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Date of creation: 01 Aug 1991
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Handle: RePEc:cdl:anderf:1170

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  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Blackwell Publishing, vol. 48(2), pages 289-309, April. [Downloadable!] (restricted)
  2. Feder, Gershon & Just, Richard E., 1977. "A study of debt servicing capacity applying logit analysis," Journal of Development Economics, Elsevier, vol. 4(1), pages 25-38, February. [Downloadable!] (restricted)
  3. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 39-106 National Bureau of Economic Research, Inc. [Downloadable!]
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    • Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and the World Economy, pages 225-236 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August. [Downloadable!] (restricted)
  5. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Blackwell Publishing, vol. 52(4), pages 647-63, October. [Downloadable!] (restricted)
  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  7. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December. [Downloadable!] (restricted)
  8. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  9. Chowdhry, Bhagwan, 1991. "What Is Different about International Lending?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(1), pages 121-48. [Downloadable!] (restricted)
  10. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October. [Downloadable!] (restricted)
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