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Voluntary Debt Reduction: Incentives and Welfare

  • Elhanan Helpman

    (International Monetary Fund)

In an economy with a debt overhang, investment depends on expected tax rates, but expected tax rates depend on the debt's face value. Therefore investment depends on the face value of debt. This relationship may lead to a positive or negative association between debt and investment. The paper explores the desirability of debt reduction. First, it characterizes circumstances in which debt reduction is desirable from the collective point of view of the creditors. Second, it formulates the forgiveness decision as a noncooperative game among creditors and explores the scope for debt reduction as an outcome of this game.

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Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 36 (1989)
Issue (Month): 3 (September)
Pages: 580-611

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Handle: RePEc:pal:imfstp:v:36:y:1989:i:3:p:580-611
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  1. Jonathan Eaton, 1987. "Public Debt Guarantees and Private Capital Flight," NBER Working Papers 2172, National Bureau of Economic Research, Inc.
  2. Michael P. Dooley, 1988. "Buy-Backs and Market Valuation of External Debt," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 215-229, June.
  3. W. Max Corden, 1988. "An International Debt Facility?," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 401-421, September.
  4. Claessens, Stijn, 1990. "The debt laffer curve: Some estimates," World Development, Elsevier, vol. 18(12), pages 1671-1677, December.
  5. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  6. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
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