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LDC Debt: Forgiveness, Indexation, and Investment Incentives

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  • Kenneth A. Froot
  • David S. Scharfstein
  • Jeremy C. Stein

Abstract

We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment, This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2541.

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Date of creation: Mar 1990
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Publication status: published as "LDC Debt: Forgiveness, Indexation, and Investment Incentives." From Journal of Finance, Vol. 44, No. 5, pp. 1335-1350, (December 1989).
Handle: RePEc:nbr:nberwo:2541

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  1. Martin Feldstein, 1988. "International Economic Cooperation," NBER Books, National Bureau of Economic Research, Inc, number feld88-4.
  2. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
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