Coordination Risk and the Price of Debt

28 Pages Posted: 14 Feb 2002

See all articles by Stephen Morris

Stephen Morris

Princeton University - Department of Economics

Hyun Song Shin

Bank for International Settlements (BIS)

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

Morris, Stephen Edward and Shin, Hyun Song, Coordination Risk and the Price of Debt (February 2002). Cowles Foundation Discussion Paper No. 1241R. Available at SSRN: https://ssrn.com/abstract=300697

Stephen Edward Morris (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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