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The Pure Theory of Country Risk

  • Jonathan Eaton
  • Mark Gersovitz
  • Joseph E. Stiglitz

This paper attempts to survey, and to put into perspective, recent lterature that has analyzed the nature of credit relations between developed and developing countries.This analysis has made use of recent advances in the economics of information and strategic interaction. Traditional concepts of solvency and liquidity are of little help in understanding problems of soverign debt. Creditors do not have the means to seize the assets of a borrower in default. Hence the borrower who is expected eventually to repay his debts should be able to borrow to meet any current debt-service obligations. A problem that is essential to a theory of international lending is that of enforcement. The difficulty is one of ensuring that the two sides of a loan contract adhere to it, in particular that the borrower repays the lender and the lenders can commit themselves to penalize the borrower if he does not.

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File URL: http://www.nber.org/papers/w1894.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1894.

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Date of creation: Apr 1986
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Publication status: published as Eaton, Jonathan, Mark Gersovitz and Joseph E. Stiglitz. "The Pure Theory of Country Risk," European Economic Review: International Seminar on Macroeconomics, Vol. 30, No. 3, pp. 481-514, June 1986.
Handle: RePEc:nbr:nberwo:1894
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  1. Jonathan Eaton & Mark Gersovitz, 1982. "A Theory of Expropriation and Deviations From Perfect Capital Mobility," NBER Working Papers 0972, National Bureau of Economic Research, Inc.
  2. Eaton, Jonathan, 1986. "Lending with costly enforcement of repayment and potential fraud," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 281-293, June.
  3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  5. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
  6. Bruce C. Greenwald & Joseph E. Stiglitz & Andrew Weiss, 1984. "Informational Imperfections in the Capital Market and Macro-Economic Fluctuations," NBER Working Papers 1335, National Bureau of Economic Research, Inc.
  7. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  8. Homi Kharas, 1984. "The Long-Run Creditworthiness of Developing Countries: Theory and Practice," The Quarterly Journal of Economics, Oxford University Press, vol. 99(3), pages 415-439.
  9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  10. Richard Arnott & Joseph Stiglitz, 1982. "Equilibrium in Competitive Insurance Markets, The Welfare Economics of Moral Hazard: Basic Analytics," Working Papers 465, Queen's University, Department of Economics.
  11. Saini, Krishan G. & Bates, Philip S., 1984. "A survey of the quantitative approaches to country risk analysis," Journal of Banking & Finance, Elsevier, vol. 8(2), pages 341-356, June.
  12. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  13. Franklin Allen, 1983. "Credit Rationing and Payment Incentives," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 639-646.
  14. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-72, December.
  15. 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.
  16. Richard Arnott & Joseph Stiglitz, 1982. "Equilibrium in Competitive Insurance Markets: The Welfare Economics of Moral Hazard," Working Papers 483, Queen's University, Department of Economics.
  17. Frank, Charles Jr. & Cline, William R., 1971. "Measurement of debt servicing capacity: An application of discriminant analysis," Journal of International Economics, Elsevier, vol. 1(3), pages 327-344, August.
  18. Edwards, Sebastian, 1984. "LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80," American Economic Review, American Economic Association, vol. 74(4), pages 726-34, September.
  19. Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February.
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