Private Renegotiations and Government Interventions in Debt Chains

54 Pages Posted: 12 Aug 2020 Last revised: 15 Oct 2021

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School; University of Pennsylvania - Finance Department

Christian C. Opp

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

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Date Written: October 14, 2021

Abstract

We propose a model of strategic debt renegotiation in which businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a debt chain, gives rise to externalities, as a lender's willingness to provide concessions to its privately-informed borrower depends on how the lender's own liabilities are expected to be renegotiated. We highlight how government interventions that aim to prevent default waves should account for these private renegotiation incentives and their interlinkages. In particular, we contrast the consequences of targeted subsidies vs. debt reduction programs following economic shocks such as a pandemic or financial crisis.

Keywords: Debt Renegotiation, Credit, Bargaining Power, Default Waves

JEL Classification: G21, G32, G33, G38

Suggested Citation

Glode, Vincent and Glode, Vincent and Opp, Christian C., Private Renegotiations and Government Interventions in Debt Chains (October 14, 2021). Available at SSRN: https://ssrn.com/abstract=3667071 or http://dx.doi.org/10.2139/ssrn.3667071

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Christian C. Opp

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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