Reputation Spillover Across Relationships with Enduring and Transient Beliefs: Reviving Reputation Models of Debt

25 Pages Posted: 29 Apr 1998 Last revised: 30 Jun 2010

See all articles by Harold L. Cole

Harold L. Cole

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

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1996

Abstract

A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid under two conditions: (i) there is a single debt relationship, and (ii) regardless of their past actions, governments can earn the (possibly state-contingent) market rate of return by saving abroad. Bulow and Rogoff conjecture that, even under condition (ii), in more general reputation models with multiple relationships and spillover across them, reputation may support debt. This paper shows what is needed for this conjecture to be true.

Suggested Citation

Cole, Harold L. and Kehoe, Patrick J., Reputation Spillover Across Relationships with Enduring and Transient Beliefs: Reviving Reputation Models of Debt (March 1996). NBER Working Paper No. w5486. Available at SSRN: https://ssrn.com/abstract=4108

Harold L. Cole

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Patrick J. Kehoe (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States
612-204-5525 (Phone)
612-204-5515 (Fax)

University of Minnesota - Twin Cities - Department of Economics ( email )

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Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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