A Game Theoretical Approach to the International Debt Overhang
This paper considers an international financial problem of a sovereign country called debt overhang. The term "debt overhang" expresses the situation where a sovereign country has borrowed money from foreign banks and has been unable to fulfill the scheduled repayments for some period. We formulate this problem as a noncooperative game with n lender banks as players where each decides either to sell its loan exposure to the debtor country at the present price of debt on the secondary market, or to wait and keep its exposure. There are many pure and mixed strategy Nash equilibria in this game. However we show that in any Nash equilibrium, the resulting secondary market price remains almost the same as the present price when the number of banks is large. We also obtain the comparative statics result that in a mixed strategy equilibrium, banks with smaller loan exposures have a greater tendency to sell than banks with larger loan exposure. In addition, we discuss the structure of the set of Nash equilibria.
|Date of creation:||Mar 1991|
|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeffrey Sachs & Harry Huizinga, 1987.
"U.S. Commercial Banks and the Developing-Country Debt Crisis,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 18(2), pages 555-606.
- Sachs, J. & Huizinga, H.P., 1987. "U.S. commercial banks and the developing-country debt crisis," Other publications TiSEM ada14007-7229-4f6d-a016-f, Tilburg University, School of Economics and Management.
- Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing Country Debt Crisis," NBER Working Papers 2455, National Bureau of Economic Research, Inc.
- Versluysen, Eugene L., 1989. "A review of alternative debt strategies," Policy Research Working Paper Series 196, The World Bank.
- Vassilis A. Hajivassiliou, 1989. "Do the Secondary Markets Believe in Life After Debt?," Cowles Foundation Discussion Papers 911, Cowles Foundation for Research in Economics, Yale University.
- Hajivassiliou,Vassilis A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank.
- Prokop, Jacek, 1992. "Duration of debt overhang with two lender banks," Economics Letters, Elsevier, vol. 38(4), pages 473-478, April.
- Jacek Prokop, 1991. "Duration of Debt Overhang with Two Lender Banks," Discussion Papers 949, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
- Jeremy I. Bulow & Kenneth Rogoff, 1986. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
- Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
- Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
- Jacek Prokop, 1998. "Dynamics of International Debt Overhang with Two Lender Banks," The Japanese Economic Review, Japanese Economic Association, vol. 49(2), pages 119-137, 06.
- Prokop, J., 1991. "Dynamic of International Debt Overhang with two Lender Banks," Working papers 946, Wisconsin Madison - Social Systems.
- Jacek Prokop, 1991. "Dynamics of International Debt Overhang with Two Lender Banks," Discussion Papers 946, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Huizinga, Harry, 1989. "How has the debt crisis affected commercial banks?," Policy Research Working Paper Series 195, The World Bank.
- Raquel Fernandez & David Kaaret, 1988. "Bank Size, Reputation, and Debt Renegotiation," NBER Working Papers 2704, National Bureau of Economic Research, Inc.
- Raquel Fernandez & Robert W. Rosenthal, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 331-349.
- Fernandez, Raquel & Kaaret, David, 1992. "Bank Heterogeneity, Reputation and Debt Renegotiation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 61-78, February. Full references (including those not matched with items on IDEAS)