Working Paper: CEPR ID: DP357
Authors: Kenneth M. Kletzer
Abstract: The literature on sovereign debt emphasizes that international financial transactions are impeded because the fulfilment of contractual obligations by a government is time-inconsistent. The process of renegotiation between private creditors and debtor governments can create further inefficiencies in the world allocation of capital. In this paper, two potential sources of social cost in the private renegotiation of debt repayments and new loans are discussed. First, legal privileges accorded to existing creditors by their collective governments can render time-consistent the efficient allocation of capital constrained by sovereign immunity when there is ex post bargaining over net transfers. The absence of possibilities for full commitment by creditors implies that the outcomes achievable with ex post bargaining of simple debt contracts differ from those achievable with state-contingent contracts, as conceived in the literature. Second, the use of offers in a renegotiation to elicit private information about debtor characteristics is socially costly.
Keywords: sovereign immunity; debt renegotiation; asymmetric information
JEL Codes: 433
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal privileges of existing creditors (G33) | constrained allocation of capital (G31) |
| constrained allocation of capital (G31) | time-inconsistent outcomes (D15) |
| Inability of creditors to make binding commitments (G33) | time-inconsistent outcomes (D15) |
| Legal privileges of existing creditors (G33) | inhibit new lending (G21) |
| Eliciting private information about debtor characteristics (G51) | incurs social costs (H49) |
| Social costs (D61) | complicate efficient allocation of capital (G31) |