Hidden Holdouts: Contract Arbitrageurs and the Pricing of Collective Rights

55 Pages Posted: 9 Jul 2018 Last revised: 3 Feb 2019

See all articles by Robert E. Scott

Robert E. Scott

Columbia University - Law School

G. Mitu Gulati

Duke University School of Law

Stephen J. Choi

New York University School of Law

Date Written: January 10, 2019


Research on the law and economics of contract typically analyzes the explicit pricing of the contract terms in a debt contract by modeling a bilateral debtor-creditor relationship, a framework we call the “classical model.” Under this model, contract terms that affect the debtor’s repayment obligations are reflected in the price the debtor pays. Much of commercial lending, however, occurs in thick markets with standardized multilateral debt instruments. Depending on the degree to which key contract terms implicate collective decision making among dispersed and anonymous creditors, the classical bilateral model of debt contracting can err in its predictions on the pricing of terms. We utilize Venezuela’s 2014-2018 debt crisis as a natural experiment to evaluate the price effects of differences in contract terms in multilateral debt instruments that require collective decision for enforcement. We test the predictions of the classical model against the predictions generated by a “collective action” model and report evidence of the non-pricing of terms consistent with the collective action story. In particular, we provide evidence of a “hidden holdout” strategy that enables the modern activist investor to capture rents without revealing arbitrage activities that enable the market to coordinate on efficient prices for different rights of enforcement.

Keywords: contract pricing, sovereign debt, holdouts, activist investors

JEL Classification: H63, H74, K12, K22, G12, G14

Suggested Citation

Scott, Robert E. and Gulati, Gaurang Mitu and Choi, Stephen J., Hidden Holdouts: Contract Arbitrageurs and the Pricing of Collective Rights (January 10, 2019). Columbia Law and Economics Working Paper No. 586; NYU Law and Economics Research Paper No. 18-27; Duke Law School Public Law & Legal Theory Series No. 2018-51. Available at SSRN: https://ssrn.com/abstract=3203949 or http://dx.doi.org/10.2139/ssrn.3203949

Robert E. Scott

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-0072 (Phone)

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Stephen J. Choi

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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