We study the effect of strengthening CACs in a debt rollover model of a sovereign debt crisis. Conditional on default, there are multiple equilibria: the impact of strengthening CACs depends critically on the prevailing equilibrium. For a subset of equilibria, (i) given a fixed number of creditors, we derive an optimal CAC threshold and (ii) given a fixed CAC threshold, as the number of creditors becomes larger, we show a convergence to efficient information aggregation. Moreover, strengthening CACs may actually increase the ex ante probability of adverse shock. Our analysis makes the case for a formal sovereign bankruptcy procedure.
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number
0711.
Length: Date of creation: Jun 2007 Date of revision:
Oct 2007 Handle: RePEc:san:cdmawp:0711
Note: This paper was previously circulated with the title ‘Bargaining, Moral Hazard and Sovereign Debt Crisis’. Contact details of provider: Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL Phone: 01334 462420 Fax: 01334 462444 Email: Web page: http://www.st-andrews.ac.uk/cdma More information through EDIRC
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information F34 - International Economics - - International Finance - - - International Lending and Debt Problems
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