Working Paper: NBER ID: w3019
Authors: Joshua Aizer; Eduardo Borensztein
Abstract: This paper analyzes the strategic role of investment from a debtor country's perspective. The framework is one in which, if the debtor country is unable to meet debt obligations, a bargaining regime determines the amount of debt repayment. In the context of a two-country real trade model, debt repayment is equal to the trade surplus of the debtor. The outcome of the bargaining game will therefore be dependent (among other things) on the level of production in the debtor country. In this framework, the paper shows that productive investment may increase or decrease the bargaining power of the debtor country. This ambiguity appears to be fairly robust.
Keywords: Investment; Debt; Bargaining; Default; Trade
JEL Codes: N/A
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productive investment (E22) | bargaining power of debtor countries (F34) |
| productive investment (E22) | amount of repayment (G32) |
| productive investment (E22) | cost of borrowing (G21) |
| bargaining power of debtor countries (F34) | repayment to creditors (G33) |
| elasticity of substitution > 1 (D11) | reduced repayment to creditors (G33) |
| elasticity of substitution < 1 (D11) | increased repayment to creditors (F34) |
| capital stock (E22) | bargaining power of debtor countries (F34) |