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Inefficient Private Renegotiation of Sovereign Debt

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  • Kletzer, Kenneth

Abstract

The literature on sovereign debt emphasizes that international financial transactions are impeded because the fulfilment of contractual obligations by a government is time-inconsistent. The process of renegotiation between private creditors and debtor governments can create further inefficiencies in the world allocation of capital. In this paper, two potential sources of social cost in the private renegotiation of debt repayments and new loans are discussed. First, legal privileges accorded to existing creditors by their collective governments can render time-consistent the efficient allocation of capital constrained by sovereign immunity when there is ex post bargaining over net transfers. The absence of possibilities for full commitment by creditors implies that the outcomes achievable with ex post bargaining of simple debt contracts differ from those achievable with state-contingent contracts, as conceived in the literature. Second, the use of offers in a renegotiation to elicit private information about debtor characteristics is socially costly.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 357.

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Date of creation: Dec 1989
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Handle: RePEc:cpr:ceprdp:357

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Keywords: Asymmetric Information; Debt Renegotiation; Sovereign Immunity;

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References

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  1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 97-109, January.
  2. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  3. Kletzer, K.M., 1988. "Sovereign Debt Renegotiation Under Asymmetric Information," Papers, Yale - Economic Growth Center 555, Yale - Economic Growth Center.
  4. Admati, Anat R & Perry, Motty, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(3), pages 345-64, July.
  5. Worrall, Tim, 1990. "Debt with potential repudiation," European Economic Review, Elsevier, vol. 34(5), pages 1099-1109, July.
  6. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  7. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 69-76, January.
  8. Sobel, Joel & Takahashi, Ichiro, 1983. "A Multistage Model of Bargaining," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(3), pages 411-26, July.
  9. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "LDC Debt: Forgiveness, Indexation, and Investment Incentives," NBER Working Papers 2541, National Bureau of Economic Research, Inc.
  10. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  11. Fernandez, R. & Rosenthal, R.W., 1988. "Sovereign-Debt Renegotiations: A Strtegic Analysis," Papers, Boston University - Center for Latin American Development Studies 85, Boston University - Center for Latin American Development Studies.
  12. Eaton, Jonathan, 1990. "Debt Relief and the International Enforcement of Loan Contracts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 43-56, Winter.
  13. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  14. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(374), pages 287-307, June.
  15. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  16. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
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Cited by:
  1. Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," 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 qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.

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