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Sovereign Debt as Intertemporal Barter

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Author Info
Kenneth M. Kletzer (University of California, Santa Cruz)
Brian D. Wright (University of California, Berkeley)

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Abstract

Borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk-averse party subject to endowment shocks. The surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties, including any other competitive agents who are potential lenders to the sovereign. The sole punishments consist of renegotiation-proof changes in the path of future payments. We show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever. That is, borrowing and lending are possible under anarchy, and are supported by punishments that consist of cheating any cheater. Long-term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short-term loans. The analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved.

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Paper provided by EconWPA in its series International Finance with number 0003004.

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Length: 34 pages
Date of creation: 29 Mar 2000
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Handle: RePEc:wpa:wuwpif:0003004

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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