Ldc Debt: Forgiveness, Indexation, and Investment Incentives
National Bureau of Economic Research (NBER)
David S. Scharfstein
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
Jeremy C. Stein
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w2541
We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment, This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.
Number of Pages in PDF File: 27
Date posted: June 8, 2004
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