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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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File URL: http://www.sciencedirect.com/science/article/B6V64-45CX02V-30/2/84e86c38df54d5a765afa08c4b1623ef
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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 34 (1990)
Issue (Month): 5 (July)
Pages: 1099-1109

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Handle: RePEc:eee:eecrev:v:34:y:1990:i:5:p:1099-1109
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June.
    • Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, 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.
  2. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  3. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
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