Debt with potential repudiation
Lending across national boundaries is different from lending within national boundaries because of the difficulty of imposing legal sanctions. This note, examines a simple model of international lending where the borrower can repudiate, without legal sanction, if this is to his advantage. The model has an infinite time horizon and it is assumed the borrower has an i.i.d. income stream. It is shown that, although debt is initially restricted, in the long run consumption is completely stabilised.
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References listed on IDEAS
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- Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
- Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991.
"The Pure Theory of Country Risk,"
in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435
National Bureau of Economic Research, Inc.
- Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
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