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A Dynamic Theory of Debt Restructuring

  • Hisashi Nakamura

    (Faculty of Economics, University of Tokyo)

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    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.

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    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-433.

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    Length: 31pages
    Date of creation: Aug 2006
    Date of revision:
    Handle: RePEc:tky:fseres:2006cf433
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