Abstract

http://ssrn.com/abstract=1570165
 
 

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Credit Default Swaps and the Empty Creditor Problem


Patrick Bolton


Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Martin Oehmke


Columbia Business School - Finance and Economics

February 7, 2010

AFA 2011 Denver Meetings Paper

Abstract:     
The empty creditor problem arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy. We analyze this problem from an ex-ante and ex-post perspective in a formal model of debt with limited commitment, by comparing contracting outcomes with and without insurance through credit default swaps (CDS). We show that CDS, and the empty creditors they give rise to, have important ex-ante commitment benefits: by strengthening creditors' bargaining power they raise the debtor's pledgeable income and help reduce the incidence of strategic default. However, we also show that lenders will over-insure in equilibrium, giving rise to an inefficiently high incidence of costly bankruptcy. We discuss a number of remedies that have been proposed to overcome the inefficiency resulting from excess insurance.

Number of Pages in PDF File: 54

JEL Classification: G32, G33, G22

working papers series





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Date posted: March 13, 2010 ; Last revised: January 28, 2013

Suggested Citation

Bolton, Patrick and Oehmke, Martin, Credit Default Swaps and the Empty Creditor Problem (February 7, 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1570165 or http://dx.doi.org/10.2139/ssrn.1570165

Contact Information

Patrick Bolton
Columbia Business School - Department of Economics ( email )
420 West 118th Street
New York, NY 10027
United States
HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Martin Oehmke (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

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