This paper deals with a particular version of the debt-overhang problem. The paper models the debt renegotiation process between a sovereign borrower and a commercial lender in a game-theoretic framework. The objective of the paper is to model and examine how a neutral third party (such as the IMF) can help to resolve conflicts between the international borrower and lender and can credibly enforce a Pareto superior solution. The relationship between the actions of the two parties: new money by the lender and adjustment policies of the borrower-is the basis for the model. The parameters of this relationship are established by the third party. The relevant decisions in the model are second best solutions that take into account the interdependence of the actions of the borrower and the lender.
|Number of pages||14|
|Journal||International Review of Financial Analysis|
|State||Published - 1993|
Bibliographical noteFunding Information:
The authorsb enefittedf rom commentsm ade by participantso f the faculty seminarsa t Bar-Ilan University and the City University of New York. The first authorw ould like to thank the Krueger Center for Finance for financial support.