A Constant Recontracting Model of Sovereign Debt

32 Pages Posted: 19 Feb 2004 Last revised: 17 Sep 2010

See all articles by Jeremy Bulow

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Kenneth Rogoff

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

Date Written: December 1986

Abstract

Few sovereign debtors have repudiated their obligations entirely. But despite the significant sanctions at the disposal of lenders, many borrowers have been able to consistently negotiate for reduced repayments. This paper presents a model of the on-going bargaining process that determines repayment levels. We derive a bargaining equilibrium in which countries with large debts achieve negotiated partial default. The ability to credibly threaten more draconian penalties in the event of repudiation may be of no benefit to lenders. Furthermore, unanticipated increases in world interest rates may actually help the borrowers by making lenders more inpatient for a negotiated settlement. Finally, Western governments may be induced to make payments to facilitate reschedulings even though efficient agreements will be reached without their intervention.

Suggested Citation

Bulow, Jeremy I. and Rogoff, Kenneth S., A Constant Recontracting Model of Sovereign Debt (December 1986). NBER Working Paper No. w2088. Available at SSRN: https://ssrn.com/abstract=344860

Jeremy I. Bulow (Contact Author)

Stanford University ( email )

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Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

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