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Developing Country Borrowing from a Monopolistic Lender: Strategic Interaction and Endogenous Leadership

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  • Jafarey, S.
  • Lahiri, S.

Abstract

We develop a two-period model with endogenous investment and credit flows. Credit is subject to quantitative restrictions. With an exogenous restriction, we analyze the welfare effects of temporary tariffs. We then consider three scenarios under which a monopoly lender optimally decides the level of credit and a borrower country chooses an import tariff: one inwhich the two parties act simultaneously and two scenarios where one of them has a first-mover advantage. The equilibrium under the leadership of the borrower country is Pareto superior to the Nash equilibrium but may or may not be to that under the leadership of the lender. If the sequence of moves is itself chosen strategically, leadership by the borrower emerges as the unique equilibrium.

Suggested Citation

  • Jafarey, S. & Lahiri, S., 2005. "Developing Country Borrowing from a Monopolistic Lender: Strategic Interaction and Endogenous Leadership," Working Papers 05/06, Department of Economics, City University London.
    • Handle: RePEc:cty:dpaper:05/06
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    References listed on IDEAS

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