Working Paper: NBER ID: w1894
Authors: Jonathan Eaton; Mark Gersovitz; Joseph E. Stiglitz
Abstract: This paper attempts to survey, and to put into perspective, recent lterature that has analyzed the nature of credit relations between developed and developing countries.This analysis has made use of recent advances in the economics of information and strategic interaction. Traditional concepts of solvency and liquidity are of little help in understanding problems of soverign debt. Creditors do not have the means to seize the assets of a borrower in default. Hence the borrower who is expected eventually to repay his debts should be able to borrow to meet any current debt-service obligations. A problem that is essential to a theory of international lending is that of enforcement. The difficulty is one of ensuring that the two sides of a loan contract adhere to it, in particular that the borrower repays the lender and the lenders can commit themselves to penalize the borrower if he does not.
Keywords: Sovereign Debt; Country Risk; International Lending
JEL Codes: F34; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inability to enforce contracts (D86) | Willingness to lend (G21) |
| Willingness to lend (G21) | Interest rates (E43) |
| Interest rates (E43) | Loan conditions (F34) |
| Expectations of future penalties (D84) | Borrowers' decisions to repay (G51) |
| Lenders' resolve to impose penalties (G21) | Borrowers' decisions to repay (G51) |
| Lenders perceived as unwilling to penalize (G21) | Likelihood of repayment (G33) |
| Moral hazard and adverse selection (D82) | Credit relations (F34) |
| Borrower characteristics (G51) | Lenders' assessment to mitigate risks (G21) |