Coordination Risk and the Price of Debt
28 Pages Posted: 14 Feb 2002
Date Written: February 2002
Abstract
Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project. Recognition of this problem lies behind corporate bankruptcy provisions across the world, and it has been identified as a culprit in international financial crises, but has received scant attention from the literature on debt pricing. Without common knowledge of fundamentals, the incidence of failure is uniquely determined provided that private information is precise enough. This affords a way to price the coordination failure. Comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation.
Keywords: Debt, Coordination, Liquidity, Common Knowledge
JEL Classification: C7, G2
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Global Games: Theory and Applications
By Stephen Morris and Hyun Song Shin
-
Demand Deposit Contracts and the Probability of Bank Runs
By Itay Goldstein and Ady Pauzner
-
Coordination Failures and the Lender of Last Resort: Was Bagehot Right after All?
By Jean-charles Rochet and Xavier Vives
-
Equilibrium Selection in Global Games with Strategic Complementarities
By David M. Frankel, Stephen Morris, ...
-
By George-marios Angeletos, Christian Hellwig, ...
-
By George-marios Angeletos, Christian Hellwig, ...
-
Bank Runs: Liquidity and Incentives
By Russell Cooper and Thomas W. Ross
-
Crises and Prices: Information Aggregation, Multiplicity and Volatility
-
Crises and Prices: Information Aggregation, Multiplicity and Volatility
-
Complementarities and Games: New Developments
By Xavier Vives