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The Scope for Collusive Behavior Among Debtor Countries

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  • Raquel Fernandez
  • Jacob Glazer

Abstract

We study the question of whether there exist strategies whereby countries are able to sustain a cartel or collusive behavior when bargaining with a bank over the amount of debt to be repaid. We show that despite the existence of economies to scale in bargaining--if commitment were possible the countries would benefit from joint bargaining--a debtors' cartel will not emerge in equilibrium (in the absence of credible commitment mechanisms). A unique subgame-perfect equilibrium exists in which the bank is effectively able to isolate each country and extract from each the same payoff that it would obtain in the absence of economies to scale. Consequently, a country would be better off if another country declared default. We also show that if two countries of unequal size are bargaining with a bank, in equilibrium a decrease in the size of the smaller country implies a greater payoff to the large country although the payoff to the small country is invariant.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2980.

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Date of creation: May 1989
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Publication status: published as Journal of Development Economics, Vol. 32 (1990): 297-313.
Handle: RePEc:nbr:nberwo:2980

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  1. Raquel Fernandez & David Kaaret, 1988. "Bank Size, Reputation, and Debt Renegotiation," NBER Working Papers 2704, National Bureau of Economic Research, Inc.
  2. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(1), pages 155-78, February.
  3. 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.
  4. 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.
  5. Jeffrey Sachs, 1983. "Theoretical Issues in International Borrowing," NBER Working Papers 1189, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  2. Fafchamps, Marcel, 1996. "Sovereign debt, structural adjustment, and conditionality," Journal of Development Economics, Elsevier, Elsevier, vol. 50(2), pages 313-335, August.
  3. Basu, Kaushik & Morita, Hodaka, 2005. "International Credit and Welfare: A Paradoxical Theorem and Its Policy Implications," Working Papers, Cornell University, Center for Analytic Economics 05-04, Cornell University, Center for Analytic Economics.
  4. Basu, Kaushik & Morita, Hodaka, 2001. "International Credit and Welfare: Some Paradoxical Results with Implications for the Organization of International Lending," Working Papers, Cornell University, Center for Analytic Economics 01-05, Cornell University, Center for Analytic Economics.

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