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A Game Theoretical Approach to the International Debt Overhang

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  • Mamoru Kaneko
  • Jacek Prokop

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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Bibliographic Info

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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  1. Jacek Prokop, 1998. "Dynamics of International Debt Overhang with Two Lender Banks," The Japanese Economic Review, Japanese Economic Association, vol. 49(2), pages 119-137, 06.
  2. 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.
  3. Fernandez, Raquel & Kaaret, David, 1992. "Bank Heterogeneity, Reputation and Debt Renegotiation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 61-78, February.
  4. Vassilis A. Hajivassiliou, 1989. "Do the Secondary Markets Believe in Life After Debt?," Cowles Foundation Discussion Papers 911, Cowles Foundation for Research in Economics, Yale University.
  5. Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing Country Debt Crisis," NBER Working Papers 2455, National Bureau of Economic Research, Inc.
  6. Huizinga, Harry, 1989. "How has the debt crisis affected commercial banks?," Policy Research Working Paper Series 195, The World Bank.
  7. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  8. Versluysen, Eugene L., 1989. "A review of alternative debt strategies," Policy Research Working Paper Series 196, The World Bank.
  9. Raquel Fernandez & David Kaaret, 1988. "Bank Size, Reputation, and Debt Renegotiation," NBER Working Papers 2704, National Bureau of Economic Research, Inc.
  10. Fernandez, Raquel & Rosenthal, Robert W, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 331-49, July.
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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. Prokop, Jacek, 1995. "Organized debt buybacks: No cure for free riding?," Journal of Development Economics, Elsevier, vol. 47(2), pages 481-496, August.
  3. 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.
  4. David Nickerson & Asha Sadanand & Venkatraman Sadanand, 1994. "Strategic delay and endogenous offers in bargaining games with private information," Journal of Economics, Springer, vol. 60(2), pages 125-154, June.
  5. Prokop, Jacek, 2012. "Bargaining over debt rescheduling," MPRA Paper 44315, University Library of Munich, Germany.
  6. Prokop, Jacek & Baranowska-Prokop, Ewa, 2012. "The Efficiency of Foreign Borrowing: The Case of Poland," MPRA Paper 44976, University Library of Munich, Germany.
  7. Prokop, J., 1991. "Dynamic of International Debt Overhang with two Lender Banks," Working papers 946, Wisconsin Madison - Social Systems.
  8. Pim Heijnen, 2009. "On the probability of breakdown in participation games," Social Choice and Welfare, Springer, vol. 32(3), pages 493-511, March.

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