Voluntary Choices in Concerted Deals: The Menu Approach to Debt Reduction in Developing Countries

Ishac Diwan () and Kenneth Kletzer

The World Bank Economic Review, 1992, vol. 6, issue 1, 91-108

Abstract: This article examines the mechanics and attributes of concerted debt reduction agreements that offer creditors a choice between exit and relending options. The menu approach sets prices for different choices that implement a decentralized equilibrium. When banks can commit to choose from the menu and are not allowed to free ride, a menu can be designed that assures that the price paid for debt repurchased is equal to the marginal value of the debt claims. This can be achieved by taxing the gains that accrue to nonexiters with a request for new money. The equilibrium amount of debt reduction rises when the new money request is increased. The importance of banks' heterogeneity for menus to dominate simple concerted buybacks and the case in which debt reduction can be financed by loans from international financial institutions are discussed. Copyright 1992 by Oxford University Press.

Date: 1992
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