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A Dynamic Theory of Debt Restructuring


  • Hisashi Nakamura

    (Faculty of Economics, University of Tokyo)


This paper studies a strategic role of debt restructuring under an optimal debt contract. It explores an infinite-horizon costly-monitoring model under Markov income shocks. It shows that, if (1) a borrower's project is expected to be profitable, (2) a lender's outside options are positively correlated with the borrower's project, and (3) disclosure costs are a medium level, then restructuring is preferred to termination of contract in default under an optimal contract. This optimal contract is implementable in a debt contract that permits debt restructuring. This paper also provides insights into autarkic ?nancing features of the world's poorest economies.

Suggested Citation

  • Hisashi Nakamura, 2006. "A Dynamic Theory of Debt Restructuring," CIRJE F-Series CIRJE-F-433, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2006cf433

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    References listed on IDEAS

    1. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts: A Meaningful Alternative to Deficit Accounting," NBER Chapters,in: Tax Policy and the Economy, Volume 5, pages 55-110 National Bureau of Economic Research, Inc.
    2. Tadahiko Tokita & Tetsuro Chino & Hideaki Kitaki & Izumi Yamamoto & Mitsuyoshi Miyagi, 1997. "The present and future National Medical Expenditure in Japan (in Japanese)," Economic Analysis, Economic and Social Research Institute (ESRI), pages 3-67.
    3. Iwamoto, Yasushi, 1998. "Japan's Labor Force in the Year 2020," Economic Review, Hitotsubashi University, vol. 49(4), pages 297-307, January.
    4. David F. Bradford & Derrick A. Max, 1997. "Implicit Budget Deficits: The Case of a Mandated Shift to Community-Rated Health Insurance," NBER Chapters,in: Tax Policy and the Economy, Volume 11, pages 129-168 National Bureau of Economic Research, Inc.
    5. Louise Sheiner & David M. Cutler, 2000. "Generational Aspects of Medicare," American Economic Review, American Economic Association, vol. 90(2), pages 303-307, May.
    6. Olivia S. Mitchell & John Piggott & Satoshi Shimizutani, 2004. "Aged-Care Support in Japan: Perspectives and Challenges," NBER Working Papers 10882, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Hisashi Nakamura, 2007. "Strategic Default Jump as Impulse Control in Continuous Time ( Revised in February 2008 )," CARF F-Series CARF-F-115, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Hisashi Nakamura, 2007. "A Continuous-Time Analysis of Optimal Debt Contracts: Theory and Applications," 2007 Meeting Papers 230, Society for Economic Dynamics.
    3. Hisashi Nakamura, 2007. "Strategic Default Jump as Impulse Control in Continuous Time," CIRJE F-Series CIRJE-F-532, CIRJE, Faculty of Economics, University of Tokyo.

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