Working Paper: NBER ID: w2887
Authors: Mark Gertler; Kenneth Rogoff
Abstract: We show that across developing countries, external debt to private creditors rises more than proportionately with income. We then develop a simple theoretical model consistent with this phenomenon and also consistent with the well-documented relationship between capital market development and growth. Our framework stresses information asymmetries at the level of individual borrowers as the source of frictions in world capital markets. Because of moral hazard problems, marginal products of capital and borrowing-lending spreads are higher in poorer countries. In a two-country version of the model, we demonstrate the possibility of a siphoning effect which exacerbates the costs of transfers. Also because of the siphoning effect, increased wealth in the rich country can stunt investment in the poor country.
Keywords: Developing Countries; External Debt; Capital Markets
JEL Codes: F34; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| per capita income (D31) | external debt to private creditors (F34) |
| wealth in rich countries (D31) | investment in poorer countries (F63) |
| information asymmetries (D82) | external debt to private creditors (F34) |
| moral hazard (G52) | external debt to private creditors (F34) |