Working Paper: NBER ID: w16632
Authors: Rohan Pitchford; Mark L. J. Wright
Abstract: Why is it difficult to restructure sovereign debt in a timely manner? In this paper we present a theory of the sovereign debt restructuring process in which delay arises as individual creditors hold-up a set- tlement in order to extract greater payments from the sovereign. We then use the theory to analyze recent policy proposals aimed at ensuring equal repayment of creditor claims. Strikingly, we show that such collective action policies may increase delay by encouraging free-riding on negotiation costs, even while preventing hold-up and reducing total negotiation costs. A calibrated version of the model can account for observed delays, and finds that free riding is quantitatively relevant: whereas in sim- ple low-cost debt restructuring operations collective mechanisms will reduce delay by more than 60%, in high-cost complicated restructurings the adoption of such mechanisms results in a doubling of delay.
Keywords: sovereign debt; negotiation; contractual environment; collective action; creditors
JEL Codes: D23; D78; F34; K12; K33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic holdout effects (C72) | delays in sovereign debt restructuring (F34) |
| individual creditors delay entering negotiations (G33) | prolonged negotiation periods (F51) |
| collective action mechanisms (D70) | increased delays due to freeriding effects (H40) |
| number of creditors increases (G32) | strategic holdout effects intensify (C72) |
| bargaining power shifts (C78) | strategic holdout effects intensify (C72) |
| collective action mechanisms (D70) | more than double the delay in complicated restructurings (G33) |
| collective action mechanisms (D70) | reduction in delays by over 60% in simpler restructurings (G33) |