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Reputation Spillover Across Relationships with Enduring and Transient Beliefs: Reviving reputation Models of Debt

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  • Harold L. Cole
  • Patrick J. Kehoe

Abstract

A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid under two conditions: (i) there is a single debt relationship, and (ii) regardless of their past actions, governments can earn the (possibly state-contingent) market rate of return by saving abroad. Bulow and Rogoff conjecture that, even under condition (ii), in more general reputation models with multiple relationships and spillover across them, reputation may support debt. This paper shows what is needed for this conjecture to be true.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5486.

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Date of creation: Mar 1996
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Publication status: published as as "Reviving Reputation Models of International Debt" in Quarterly Review of the Federal Reserve Bank of Minneapolis, Winter 1997
Handle: RePEc:nbr:nberwo:5486
Note: IFM
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Find related papers by JEL classification:

  • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
  • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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  1. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  2. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
  3. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  4. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
  5. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
  6. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  7. Harold L. Cole & James Dow & William B. English, 1994. "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report 180, Federal Reserve Bank of Minneapolis.
  8. Wolfgang Pesendorfer, 1992. "Sovereign Debt: Forgiving and Forgetting Reconsidered," Discussion Papers 1016, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Fernandez, Raquel & Rosenthal, Robert W, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 331-49, July.
  10. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
  11. 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.
  12. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  13. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
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Cited by:

  1. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  2. Mark Aguiar, 2011. "Comment on "On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?"," NBER Chapters, in: NBER Macroeconomics Annual 2010, Volume 25, pages 37-46 National Bureau of Economic Research, Inc.
  3. Rong Qian & Carmen M. Reinhart & Kenneth Rogoff, . "On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?," Working Paper 14879, Harvard University OpenScholar.
  4. Reinhart, Carmen & Qian, Rong & Rogoff, Kenneth, 2010. "Do countries “graduate” from crises? Some historical perspective," MPRA Paper 24761, University Library of Munich, Germany.
  5. Federico Sturzenegger & Punan Chuham, 2003. "Default`s in the 1990`s: What have we learned?"," Business School Working Papers seis, Universidad Torcuato Di Tella.
  6. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
  7. De Broeck, Mark, 1997. "The financial structure of government debt in OECD countries: An examination of the time-consistency issue," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 279-301, July.
  8. Cole, Harold L. & Kehoe, Patrick J., 1995. "The role of institutions in reputation models of sovereign debt," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 45-64, February.
  9. Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation spillover across relationships: reviving reputation models of debt," Staff Report 209, Federal Reserve Bank of Minneapolis.

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