The role of lender behavior in International project finance

Sumru Altug (), Sule Ozler and Murat Usman ()

Discussion Papers from Department of Economics, University of York

Abstract: A sovereign borrower seeks to raise funds internationally to finance a fixed-size project, which no single lender can finance alone. Lenders cannot lend more than their endowments, which is private information. A coordination failure arises; therefore, some socially desirable projects may not be financed, even if ex post feasible. There are multiple equilibria, and a conflict exists between lenders about which equilibrium to coordinate on. When endowments are volatile, some lenders prefer an equilibrium where the project is financed with probability p < 1, even if ex post feasible. The government eliminates such equilibria by offering a sufficiently high return, but only if endowment volatility is small.

Keywords: International project finance; lender behavior; private information; coordination problem; subgame perfect equilibria. (search for similar items in EconPapers)
JEL-codes: F21 F34 (search for similar items in EconPapers)

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