A dynamic bargaining model of sovereign debt
This paper models a dynamic bargaining game between a highly indebted country and its commercial bank consortium, to analyze the determinants of the resulting re-scheduling agreements and the net transfer of resources over time. The bargaining game is based on the simple paradigm that if no agreement is reached for a current payment, the banks would apply default sanctions. The author found that under general conditions settlements would be reached and default sanctions would not be applied in equilibrium. But the default sanctions would be a credible threat underlying the negotiations and determining the equilibrium payments. These equilibrium payments in turn would determine the credit ceiling and the later commercial discounts on the debt market. Unlike other bargaining games, this one explicitly models the debtor country's economic structure, featuring an import-dependent economy subject to foreign exchange and fiscal constraints. Moreover, the model is truly dynamic in the sense that the future negotiating environment is endogenously determined by current bargaining outcomes. Under plausible refinements and assumptions, the author obtains a closed-form solution for net transfers, dependent on various structural and policy parameters.
|Date of creation:||31 Oct 1991|
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- Oliver Hart & John Moore, 1997.
"Default and Renegotiation: A Dynamic Model of Debt,"
NBER Working Papers
5907, National Bureau of Economic Research, Inc.
- Oliver Hart & John Moore, 1998. "Default And Renegotiation: A Dynamic Model Of Debt," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 1-41, February.
- Hart, O. & Moore, J., 1989. "Default And Renegotiation: A Dynamic Model Of Debt," Working papers 520, Massachusetts Institute of Technology (MIT), Department of Economics.
- Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," Harvard Institute of Economic Research Working Papers 1792, Harvard - Institute of Economic Research.
- Ariel Rubinstein, 2010.
"Perfect Equilibrium in a Bargaining Model,"
Levine's Working Paper Archive
661465000000000387, David K. Levine.
- Raquel Fernandez & Robert W. Rosenthal, 1988.
"Sovereign-debt Renegotiations: A Strategic Analysis,"
NBER Working Papers
2597, National Bureau of Economic Research, Inc.
- Fernandez, R. & Rosenthal, R.W., 1988. "Sovereign-Debt Renegotiations: A Strtegic Analysis," Papers 85, Boston University - Center for Latin American Development Studies.
- Jeffrey Sachs, 1983. "Theoretical Issues in International Borrowing," NBER Working Papers 1189, National Bureau of Economic Research, Inc.
- Fernandez, R. & Glazer, J., 1988. "Why Haven'T Debtor Countries Formed A Cartel?," Papers 84, Boston University - Center for Latin American Development Studies.
- Bulow, Jeremy & Rogoff, Kenneth, 1990. "Cleaning Up Third World Debt without Getting Taken to the Cleaners," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 31-42, Winter.
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