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Strategic Investment in a Debt Bargaining Framework

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  • Joshua Aizenman
  • Eduardo R. Borensztein

Abstract

This paper analyzes the strategic role of investment from a debtor country's perspective. The framework is one in which, if the debtor country is unable to meet debt obligations, a bargaining regime determines the amount of debt repayment. In the context of a two-country real trade model, debt repayment is equal to the trade surplus of the debtor. The outcome of the bargaining game will therefore be dependent (among other things) on the level of production in the debtor country. In this framework, the paper shows that productive investment may increase or decrease the bargaining power of the debtor country. This ambiguity appears to be fairly robust.

Suggested Citation

  • Joshua Aizenman & Eduardo R. Borensztein, 1989. "Strategic Investment in a Debt Bargaining Framework," NBER Working Papers 3019, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3019
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    References listed on IDEAS

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    1. Aizenman, Joshua, 1991. "Trade dependency, bargaining and external debt," Journal of International Economics, Elsevier, vol. 31(1-2), pages 101-120, August.
    2. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
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    6. International Monetary Fund, 1989. "Foreign Borrowing and Export Promotion Policies," IMF Working Papers 1989/016, International Monetary Fund.
    7. W. Max Corden, 1988. "Debt Relief and Adjustment Incentives," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 628-643, December.
    8. International Monetary Fund, 1988. "Voluntary Debt Reduction: Incentives and Welfare," IMF Working Papers 1988/084, International Monetary Fund.
    9. Alvin E Roth, 2008. "Axiomatic Models of Bargaining," Levine's Working Paper Archive 122247000000002376, David K. Levine.
    10. International Monetary Fund, 1989. "A Delicate Equilibrium: Debt Relief and Default Penalties in an International Context," IMF Working Papers 1989/010, International Monetary Fund.
    11. Eduardo Borensztein & Atish Rex Ghosh, 1989. "Foreign Borrowing and Export Promotion Policies," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 904-933, December.
    12. Jeffrey D. Sachs & Anthony M. Solomon & William S. Ogden & Eduardo Wiesner & R. T. McNamar, 1988. "Developing Country Debt," NBER Chapters, in: International Economic Cooperation, pages 233-320, National Bureau of Economic Research, Inc.
    13. Rotemberg, Julio J., 1991. "Sovereign debt buybacks can lower bargaining costs," Journal of International Money and Finance, Elsevier, vol. 10(3), pages 330-348, September.
    14. International Monetary Fund, 1988. "Trade Dependency, Bargaining and External Debt," IMF Working Papers 1988/090, International Monetary Fund.
    15. International Monetary Fund, 1988. "Voluntary Debt Reduction: Incentives and Welfare," IMF Working Papers 1988/097, International Monetary Fund.
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