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Does Strengthening Collective Action Clauses (CACs) Help?

  • Sayantan Ghosal
  • Kannika Thampanishvong

    ()

We study the effect of strengthening CACs in a debt rollover model of a sovereign debt crisis. Conditional on default, there are multiple equilibria: the impact of strengthening CACs depends critically on the prevailing equilibrium. For a subset of equilibria, (i) given a fixed number of creditors, we derive an optimal CAC threshold and (ii) given a fixed CAC threshold, as the number of creditors becomes larger, we show a convergence to efficient information aggregation. Moreover, strengthening CACs may actually increase the ex ante probability of adverse shock. Our analysis makes the case for a formal sovereign bankruptcy procedure.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200711.

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Date of creation: 15 Jun 2007
Date of revision: 15 Oct 2007
Handle: RePEc:san:cdmawp:0711
Note: This paper was previously circulated with the title ‘Bargaining, Moral Hazard and Sovereign Debt Crisis’.
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