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LDC Debt: Forgiveness, Indexation, and Investment Incentives

  • Froot, Kenneth A
  • Scharfstein, David S
  • Stein, Jeremy C

The authors compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment. This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. They also reach new conclusions about the desirability of default penalties under asymmetric information. Copyright 1989 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 44 (1989)
Issue (Month): 5 (December)
Pages: 1335-50

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Handle: RePEc:bla:jfinan:v:44:y:1989:i:5:p:1335-50
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  1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  2. Martin Feldstein, 1988. "International Economic Cooperation," NBER Books, National Bureau of Economic Research, Inc, number feld88-4, 07.
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