A Constant Recontracting Model of Sovereign Debt
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CitationBulow, Jeremy, and Kenneth S. Rogoff. 1989. A constant recontracting model of sovereign debt. Journal of Political Economy 97(1): 155-178.
AbstractWe present a dynamic model of international lending in which borrowers cannot commit to future repayments and in which debtors can sometimes successfully negotiate partial defaults or "rescheduling agreements." All parties in a debt rescheduling negotiation realize that today's rescheduling agreement may itself have to be renegotiated in the future. Our bargaining-theoretic approach allows us to handle the effects of uncertainty on sovereign debt contracts in a much more satisfactory way than in earlier analyses. The framework is readily extended to analyze the conflicting interests of different lenders and of banks and creditor country taxpayers.
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