Additional Lending upon Default with Endogenous Default Penalty

In-Mee Baek and Arindam Bandopadhyaya
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In-Mee Baek: Suffolk University
Arindam Bandopadhyaya: University of Massachusetts, Boston

Eastern Economic Journal, 1997, vol. 23, issue 4, 441-450

Abstract: This paper examines the additional lending decision of a creditor to a sovereign debtor in default. The analysis incorporates the prevalence of partial default and the amount of inherited debt in default. We show that an increase in additional lending, L, could increase the probability of repayment of both the loan outstanding and L, thereby increasing the expected return of L for a given interest rate. Thus, additional lending could be provided at a lower contract interest rate, implying a downward sloping additional loan supply curve. Moreover, we show that over some regions of the additional loan supply schedule the contract interest rate could be below the risk-free rate.

Keywords: Debt; Lending (search for similar items in EconPapers)
JEL-codes: F34 O19 (search for similar items in EconPapers)
Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:eej:eeconj:v:23:y:1997:i:4:p:441-450

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