To Pay or Not to Pay: A Model of International Defaults,
Abstract
International loans, especially those made to foreign sovereign lenders, differ in a number of ways from most loans made by domestic banks to residents of their own country. They are usually larger than most domestic loans, the lender has more difficulty in obtaining reliable data on the borrower, and, most importantly, lender and borrower are under different jurisdictions. This last factor makes enforcing a loan contract considerably more difficult, and provides incentives for the borrower to avoid prompt repayment, even if such repayment is feasible. Guttentag and Herring equate the presence of such incentives loosely with moral hazard. Eaton and Gersovitz develop a formal model of lending (with a single borrower and multiple lenders acting in unison) that explicitly takes debt repudiation into account. In their model, borrowers are inherently dishonest, i.e., they will default on their loans if their expected utility maximization so dictates. We prefer to characterize such behavior by the somewhat more neutral term rational. This paper simultaneously expands and simplifies the Eaton-Gersovitz model and places it in a game theoretic context borrowed from Dixit. We consider only two time periods, the present and the future, and take lending decisions that were made in the past as given. Additional keywords include: One-period and multiple period mathematical models.
Document Details
- Document Type
- Technical Report
- Publication Date
- Oct 01, 1984
- Accession Number
- ADA152567
Entities
People
- D. F. Kohler
Organizations
- RAND Corporation