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Debt “Hold Up†and International Lending

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  • Rodney Ramcharan
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    Abstract

    Are lending contracts between international financial institutions (IFIs) and sovereign borrowers optimal? To address this question this paper builds on two ideas. First, the prospect of future debt relief can make it profitable for an IFI to continue lending even if lending contracts are currently violated. Second, some policy makers may prefer not implement reform contracts, and this preference remains unobserved to the IFI. Hence, some governments may strategically implement contracts in order to accumulate debt. When the debt stock becomes sufficiently large, it can be used as an “hold up†instrument, enabling the government to implement its preferred policy, assured that lending will continue. To mitigate the risk of “hold upâ€, the IFI may use lending contracts to screen such borrowers, leading to distorted reform contracts.

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    Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 462.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:feam04:462

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    Keywords: reputation; reform; IMF lending;

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    9. Drazen, Allan, 2002. "Conditionality and Ownership in IMF Lending: A Political Economy Approach," CEPR Discussion Papers 3562, C.E.P.R. Discussion Papers.
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    12. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
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    15. Mohsin S. Khan & Sunil Sharma, 2001. "IMF Conditionality and Country Ownership of Programs," IMF Working Papers 01/142, International Monetary Fund.
    16. repec:fth:oxesaf:99-18 is not listed on IDEAS
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