Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt

Satyajit Chatterjee () and Burcu Eyigungor

No 654, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority in any bankruptcy or restructuring proceedings. The goal of this paper is to incorporate seniority in a quantitatively realistic, infinite horizon model of sovereign debt and default and examine, both theoretically and quantitatively, the extent to which seniority can mitigate the debt dilution problem.

Date: 2013
New Economics Papers: this item is included in nep-cba and nep-dge
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Debt dilution and seniority in a model of defaultable sovereign debt (2013)
Working Paper: Debt dilution and seniority in a model of defaultable sovereign debt (2012)
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