The Pure Theory of Country Risk

60 Pages Posted: 16 Jul 2004 Last revised: 6 Sep 2010

See all articles by Jonathan Eaton

Jonathan Eaton

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Mark Gersovitz

Johns Hopkins University - Zanvyl Krieger School of Arts and Sciences; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: April 1986

Abstract

This paper attempts to survey, and to put into perspective, recent lterature that has analyzed the nature of credit relations between developed and developing countries.This analysis has made use of recent advances in the economics of information and strategic interaction. Traditional concepts of solvency and liquidity are of little help in understanding problems of soverign debt. Creditors do not have the means to seize the assets of a borrower in default. Hence the borrower who is expected eventually to repay his debts should be able to borrow to meet any current debt-service obligations. A problem that is essential to a theory of international lending is that of enforcement. The difficulty is one of ensuring that the two sides of a loan contract adhere to it, in particular that the borrower repays the lender and the lenders can commit themselves to penalize the borrower if he does not.

Suggested Citation

Eaton, Jonathan and Gersovitz, Mark and Stiglitz, Joseph E., The Pure Theory of Country Risk (April 1986). NBER Working Paper No. w1894. Available at SSRN: https://ssrn.com/abstract=227166

Jonathan Eaton (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

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HOME PAGE: http://www.econ.nyu.edu/user/eatonj/

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Mark Gersovitz

Johns Hopkins University - Zanvyl Krieger School of Arts and Sciences ( email )

Department of Economics
Baltimore, MD 21218
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
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(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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