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Does strengthening Collective Action Clauses (CACs) help?

  • Ghosal, Sayantan

    (Department of Economics, University of Warwick)

  • Thampanishvong, Kannika

    (School of Economics and Finance, University of St Andrews,)

In a model with both issues of sovereign debtor moral hazard and creditor coordination under incomplete information, we show that the resulting conflict between ex ante and interim efficiency limits the welfare impact of strengthening CACs. Conditional on default, we show that an interim efficient CAC threshold exists and improving creditor coordination results in welfare gains. However, when ex ante efficiency requires the sovereign debtor to choose actions that reduce the probability of default, improved creditor coordination reduces ex ante efficiency and the interim efficient CAC threshold is higher than the ex ante efficient CAC threshold.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2009/twerp_895.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 895.

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Length: 22 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:wrk:warwec:895
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