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LDC Debt: Forgiveness, Indexation, and Investment Incentives

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  • Kenneth A. Froot
  • David S. Scharfstein
  • Jeremy C. Stein

Abstract

We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment, This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.

Suggested Citation

  • Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1988. "LDC Debt: Forgiveness, Indexation, and Investment Incentives," NBER Working Papers 2541, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2541
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    1. Martin Feldstein, 1988. "International Economic Cooperation," NBER Books, National Bureau of Economic Research, Inc, number feld88-4.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
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