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A Game Theoretical Approach to the International Debt Overhang

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Author Info
Mamoru Kaneko
Jacek Prokop

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Abstract

This paper considers an international financial problem of a sovereign country called debt overhang. The term "debt overhang" expresses the situation where a sovereign country has borrowed money from foreign banks and has been unable to fulfill the scheduled repayments for some period. We formulate this problem as a noncooperative game with n lender banks as players where each decides either to sell its loan exposure to the debtor country at the present price of debt on the secondary market, or to wait and keep its exposure. There are many pure and mixed strategy Nash equilibria in this game. However we show that in any Nash equilibrium, the resulting secondary market price remains almost the same as the present price when the number of banks is large. We also obtain the comparative statics result that in a mixed strategy equilibrium, banks with smaller loan exposures have a greater tendency to sell than banks with larger loan exposure. In addition, we discuss the structure of the set of Nash equilibria.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 945.

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Date of creation: Mar 1991
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Handle: RePEc:nwu:cmsems:945

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing-Country Debt Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1987-2), pages 555-606. [Downloadable!]
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  2. Raquel Fernandez & David Kaaret, 1988. "Bank Size, Reputation, and Debt Renegotiation," NBER Working Papers 2704, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jacek Prokop, 1991. "Dynamics of International Debt Overhang with Two Lender Banks," Discussion Papers 946, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  4. Versluysen, Eugene L., 1989. "A review of alternative debt strategies," Policy Research Working Paper Series 196, The World Bank. [Downloadable!]
  5. Hajivassiliou, V. A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank. [Downloadable!]
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  6. Huizinga, Harry, 1989. "How has the debt crisis affected commercial banks?," Policy Research Working Paper Series 195, The World Bank. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jacek Prokop, 1991. "Duration of Debt Overhang with Two Lender Banks," Discussion Papers 949, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  2. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Pim Heijnen, 2009. "On the probability of breakdown in participation games," Social Choice and Welfare, Springer, vol. 32(3), pages 493-511, March. [Downloadable!] (restricted)
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