IDEAS home Printed from https://ideas.repec.org/p/cpb/discus/261.html
   My bibliography  Save this paper

Optimal bail-out policies under renegotiation

Author

Listed:
  • Michiel Bijlsma

    ()

  • Gijsbert Zwart

    ()

Abstract

We study how the possibility of renegotiation affects optimal bail-out policies for countries under asymmetric information on a country's cost of reforms. To that end, we solve the Bellman equation describing the optimal bail-out mechanism in a multiple-period principal-agent model with adverse selection and renegotiation. In each period, the agent can incrementally raise its level of reforms. The principal values these reforms and negotiates with the agent over reforms and payments. We show that the first-best efficient outcome is reached after two periods when spill-over benefits are quadratic. The principal can use market discipline to improve the outcome. Market discipline can lower the rents the principal has to pay and speed up the renegotiation process.

Suggested Citation

  • Michiel Bijlsma & Gijsbert Zwart, 2013. "Optimal bail-out policies under renegotiation," CPB Discussion Paper 261, CPB Netherlands Bureau for Economic Policy Analysis.
  • Handle: RePEc:cpb:discus:261
    as

    Download full text from publisher

    File URL: http://www.cpb.nl/sites/default/files/publicaties/download/dp261-optimal-bail-out-policies-under-renegotiation.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. repec:eee:jetheo:v:171:y:2017:i:c:p:136-173 is not listed on IDEAS
    2. Jean-Jacques Laffont & Jean Tirole, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 597-625.
    3. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpb:discus:261. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/cpbgvnl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.