Bargaining over debt rescheduling
AbstractThe objective of this paper is to investigate the bargaining over debt rescheduling between a sovereign borrower and a foreign lender in a more general framework than in the preceding literature. We propose a model in which the impact of the bargaining power of the creditor and the debtor can be analyzed in the situation of debt overhang. The concept of Nash bargaining solution is applied to predict the behaviour of international financial market’s participants. The extended framework of debt renegotiations allows to identify several possible equilibria that could serve as potential resolutions of the debt overhang problem. In an illustrative numerical example, we show that a significant level of forgiveness on the part of the lenders is indispensible in the process of bargaining over debt rescheduling. However, the actual size of the forgiveness varies with the specific distribution of the bargaining power between the debtor and the creditor.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 44315.
Date of creation: 2012
Date of revision:
debt rescheduling; foreign borrowing; international debt overhang; bargaining;
Find related papers by JEL classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
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