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Duration of Debt Overhang with Two Lender Banks

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  • Jacek Prokop

Abstract

This paper discusses the duration of the debt overhang with two lender banks. We model the problem as an infinite horizon game with two banks as players. In every period, each bank decides either to sell its loan exposure to the debtor country at the present secondary market price, or to wait and keep its exposure to the next period. Under the assumption of homogeneous price function and short length of periods, we show that the expected duration in the equilibrium becomes large when the degree of homogeneity is low, and tends to 1n 2/ 1n beta^2 (beta is the annual interest factor) as the degree of homogeneity approaches zero. This result implies that the lower bound for the duration is 4 years. We interpret it as a tendency for the debt overhang to last for a somewhat long time.

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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 949.

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Date of creation: Jun 1991
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Handle: RePEc:nwu:cmsems:949

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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
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Web page: http://www.kellogg.northwestern.edu/research/math/
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  1. 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.
  2. Mamoru Kaneko & Jacek Prokop, 1991. "A Game Theoretical Approach to the International Debt Overhang," Discussion Papers 945, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. Mamoru Kaneko & Jacek Prokop, 1993. "A game theoretical approach to the international debt overhang," Journal of Economics, Springer, vol. 58(1), pages 1-24, February.
  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. Prokop, Jacek, 2012. "Bargaining over debt rescheduling," MPRA Paper 44315, University Library of Munich, Germany.
  4. Prokop, Jacek & Baranowska-Prokop, Ewa, 2012. "The Efficiency of Foreign Borrowing: The Case of Poland," MPRA Paper 44976, University Library of Munich, Germany.

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