Asymmetries of Information and LDC Borrowing with Sovereign Risk

Kletzer, Kenneth M.

doi:10.2307/2232351

Cited by 167 publications

(95 citation statements)

References 8 publications

(6 reference statements)

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“…Gersovitz (1981a, 1983), Kletzer (1984) and Manuelli (1984) devise models in which the borrowers desire to maintain a reputation for creditworthiness in order to borrow again supports an equilibrium with lending. Klein and Leffler (1981) and, more formally, Dybvig and Spatt (1980) and Shapiro (1983) explain a firm's incentive to provide quality on the basis of its incentive to maintain a reputation.…”

Section: Resultsmentioning

confidence: 99%

Lending with Costly Enforcement of Repayment and Potential Fraud

Eaton

1985

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If contracts are costlessly enforcible then insolvency is the only reason for nonrepayment of loans. While some models have examined the borrower's incentive to repay, it has typically been assumed that the penalty suffered by a debtor in default is imposed automatically and without cost to the lender.If in fact invoking a penalty is costly, Pareto-improving loans may be dynamically inconsistent not because of the absence of a sufficiently harsh penalty for default, but because the lender has no incentive actually to implement the penalty in the event of default. In such situations infinitelylived institutions can emerge as banking intermediaries between lenders and borrowers. These institutions, repeatedly involved in lending, have an incentive to enforce contracts that individual lenders lack. They can consequently sustain more lending. For their reputations as enforcers of contracts to have value requires that banks earn strictly positive profits.Maintaining the value of bank equity also provides an incentive for bank owners to invest deposits rather than to use these funds fraudulently.Because of the supernormal profits that banks must earn, an equilibrium that is sustained by bank reputation will not replicate an equilibrium in which loan repayment is automatically guaranteed.

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Section: Resultsmentioning

confidence: 99%

Lending with Costly Enforcement of Repayment and Potential Fraud

Eaton

1985

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“…The results of our paper continue to apply in the presence of multiple-equilibria as long as the susceptibility to multiple-equilibria increases with balance sheet imbalances. 13 See Kletzer (1984) for a model of possible inefficiencies associated with sovereign risk, and Levy…”

Section: Discussionmentioning

confidence: 99%

Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008–2009, and a cost benefit analysis

Aizenman¹

2011

Journal of Economic Dynamics and Control

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“…At the margin, the private cost of borrowing will be less than the social cost because private borrowing increases the expected costs of default. Similarly, as demonstrated by Kletzer [1984], when foreign lenders cannot observe the total borrowing by the government or guaranteed by the government, indebtedness is higher than is optimal for the government. The sovereign needs to monitor its increase in liabilities and lenders have an incentive to coordinate lending by announcing loans and terms.…”

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confidence: 86%

Sovereign Debt, Volatility and Insurance

Kletzer

2004

SSRN Journal

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External debt increases the vulnerability of indebted emerging market economies to macroeconomic volatility and financial crises. Capital account reversals often lead to sovereign debt repayment crises that are only resolved after prolonged and difficult debt restructuring. Foreign indebtedness exacerbates domestic financial distress in crisis, increasing both the incidence and severity of emerging market crises. These outcomes contrast with the presumption that access to international capital markets should help countries to smooth domestic consumption and investment against macroeconomic shocks. This paper uses models of sovereign to reconsider the role of sovereign debt renegotiation for international risk sharing and presents an approach for analyzing contractual innovations for implementing contingent debt repayments. The financial innovations that might allow risk-sharing rather than risk-inducing capital flows go beyond contractual changes that ease debt renegotiation by separating contingent payments from bonds.

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Asymmetries of Information and LDC Borrowing with Sovereign Risk

Cited by 167 publications

References 8 publications

Lending with Costly Enforcement of Repayment and Potential Fraud

Lending with Costly Enforcement of Repayment and Potential Fraud

Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008–2009, and a cost benefit analysis

Sovereign Debt, Volatility and Insurance

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