Private Renegotiations and Government Interventions in Debt Chains
54 Pages Posted: 12 Aug 2020 Last revised: 15 Oct 2021
Date Written: October 14, 2021
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: Suggested Citation