Sovereign-Debt Renegotiations: A Strtegic Analysis
The process of debt-rescheduling between a creditor and a sovereign (LDC) debtor is modeled as a noncooperative game built on a one-sector growth model. The creditor's threat to impose default penalties is ignored here as inherently incredible; instead, the debtor's motivation for repayment is to reap benefits from attaining an improved credit standing in international capital markets. The creditor can forgive portions of the outstanding debt so that a real-time bargaining process results with concessions being in the form of debt-service payments by the debtor and debt forgiveness by the creditor. Subgame-perfect equilibria of the game are characterized the main finding is that these all result in Pareto optima in which the creditor extracts all the surplus.
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|Date of creation:||1988|
|Date of revision:|
|Contact details of provider:|| Postal: U.S.A. BOSTON UNIVERSITY, CENTER FOR LATIN AMERICAN DEVELOPMENT STUDIES, 147 BAY STATE ROAD BOSTON MASSACHUSETTS 02215 U.S.A.|
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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.
- Jeffrey Sachs, 1983. "Theoretical Issues in International Borrowing," NBER Working Papers 1189, National Bureau of Economic Research, Inc.
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