"Beneficial" Delays in Debt Restructuring Negotiations

Ran Bi
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Ran Bi: Research Department, International Monetary Fund

No 766, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: Delays in debt restructuring negotiations are commonly observed and are widely regarded as costly and inefficient. This paper argues, however, that delays can be beneficial in that they allow the economy to recover from a crisis and make more resources available to settle the defaulted debt. As a result, the negotiating parties can be better off by waiting and then dividing a larger "cake." To examine whether this argument can explain the observed length of delays in the recent debt restructurings, this paper constructs a dynamic model of sovereign default in which debt renegotiation is modeled as a stochastic bargaining game based on Merlo and Wilson's (1995) framework. Quantitative analysis shows that this model can generate an average delay length comparable to that experienced by Argentina in its most recent debt restructuring.

Date: 2008
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