Reputation Spillover across Relationships: Reviving Reputation Models of Debt

Posted: 25 Sep 2008

See all articles by Patrick J. Kehoe

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1, 1996

Abstract

A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid under two conditions: (i) there is a single debt relationship, and (ii) regardless of their past actions, governments can earn the (possibly state-contingent) market rate of return by saving abroad. Bulow and Rogoff conjecture that, even under condition (ii), in more general reputation models with multiple relationships and spillover across them, reputation may support debt. This paper shows what is needed for this conjecture to be true.

Keywords: Default, Borrowing and lending, Lending crises, Reputation, Soverign Debt

JEL Classification: E61, F34, F00

Suggested Citation

Kehoe, Patrick J. and Cole, Harold L., Reputation Spillover across Relationships: Reviving Reputation Models of Debt (March 1, 1996). Available at SSRN: https://ssrn.com/abstract=1273146

Patrick J. Kehoe (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
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612-204-5525 (Phone)
612-204-5515 (Fax)

University of Minnesota - Twin Cities - Department of Economics ( email )

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United States

National Bureau of Economic Research (NBER) ( email )

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Harold L. Cole

University of Pennsylvania - Department of Economics ( email )

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Philadelphia, PA 19104
United States
215-898-7788 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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