27 Pages Posted: 8 Jun 2004
Date Written: March 1988
We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment, This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.
Suggested Citation: Suggested Citation
Froot, Kenneth and Scharfstein, David S. and Stein, Jeremy C., Ldc Debt: Forgiveness, Indexation, and Investment Incentives (March 1988). NBER Working Paper No. w2541. Available at SSRN: https://ssrn.com/abstract=425568