Abstract
| Original language | English |
|---|---|
| Place of Publication | www |
| Publisher | SSRN: Social Science Research Network |
| Number of pages | 22 |
| Publication status | Published - 2012 |
Keywords
- Soveriegn Debt
- Costly State Verification
- Financial Contracting
- Repudiation Risk
- Stategic Deafult
Cite this
}
Incentive-Compatible Sovereign Debt. / Bersem, Mario R. C.
www : SSRN: Social Science Research Network, 2012.Research output: Working paper › Research
TY - UNPB
T1 - Incentive-Compatible Sovereign Debt
AU - Bersem, Mario R. C.
PY - 2012
Y1 - 2012
N2 - This paper presents a theory of sovereign borrowing and lending when there is no court to enforce repayment obligations. Specifically, I extend the costly state verification approach in financial contracting to include an ex-post repayment decision in which the borrower repays creditors to avoid repudiation costs. I derive the optimal loan contract, which I call “repudiation-proof debt,” and show how it saves on costly verification and avoids repudiation. Repudiation-proof debt can explain several key facts of sovereign borrowing: (i) why governments issue bonds in the first place; (ii) why strategic defaults occur even under the optimal loan contract; (iii) why such defaults are neither marginal nor total repudiation; and (iv) how repudiation costs mitigate sovereign risk and determine debt capacity in the absence of enforcement.
AB - This paper presents a theory of sovereign borrowing and lending when there is no court to enforce repayment obligations. Specifically, I extend the costly state verification approach in financial contracting to include an ex-post repayment decision in which the borrower repays creditors to avoid repudiation costs. I derive the optimal loan contract, which I call “repudiation-proof debt,” and show how it saves on costly verification and avoids repudiation. Repudiation-proof debt can explain several key facts of sovereign borrowing: (i) why governments issue bonds in the first place; (ii) why strategic defaults occur even under the optimal loan contract; (iii) why such defaults are neither marginal nor total repudiation; and (iv) how repudiation costs mitigate sovereign risk and determine debt capacity in the absence of enforcement.
KW - Soveriegn Debt
KW - Costly State Verification
KW - Financial Contracting
KW - Repudiation Risk
KW - Stategic Deafult
KW - Sovereign Debt
KW - Costly State Verification
KW - Financial Contracting
KW - Repudiation Risk
KW - Strategic Default
M3 - Working paper
BT - Incentive-Compatible Sovereign Debt
PB - SSRN: Social Science Research Network
CY - www
ER -