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Sovereign Debt as Intertemporal Barter

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  • Kletzer, Kenneth M.
  • Wright, Brian D.

Abstract

Borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk-averse party subject to endowment shocks. The surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties, including any other competitive agents who are potential lenders to the sovereign. The sole punishments consist of renegotiation-proof changes in the path of future payments. We show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever. That is, borrowing and lending are possible under anarchy, and are supported by punishments that consist of cheating any cheater. Long-term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short-term loans. The analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number qt4qg3c42v.

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Date of creation: 01 Jul 1998
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Handle: RePEc:cdl:ciders:qt4qg3c42v

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Keywords: Sovereign debt; intertemporal barter; renegotiation; credit markets under anarchy; economics;

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