Debt Restructurings with Multiple Creditors
International Monetary Fund (IMF) - Research Department
Paolo G. Garella
University of Milan - Dipartimento di Scienze Economiche, Aziendali e Statistiche
Working Paper No 329 in Economics
We develop a model in which debt forgiveness can be Pareto- efficient because it improves incentives to invest. A debt restructuring plan, however, must be unanimously approved by a multiplicity of creditors who have private information about the liquidation value of the debtor. Using mechanism design, we show that too little debt forgiveness is granted in equilibrium, as expected. More interestingly, we find that exchange offers, similar to those used in US corporate debt workouts in the 1980s, are the optimal restructuring scheme for the debtor, as they allow creditors to contribute to debt forgiveness at different levels. Also, when creditors have correlated values they are more willing to offer debt forgiveness, and the debtor is better off. This is the opposite of the `winner's curse' phenomenon in auction theory.
JEL Classification: D82, G34, G33working papers series
Date posted: August 24, 1999
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.359 seconds