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Debt and Maturity without Commitment

Dirk Niepelt ()

No 567, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: I analyze how lack of commitment affects the maturity structure of sovereign debt. Ex post, the government trades off the gains from default induced redistribution against the cost of defaulting. Ex ante, the government issues debt of various maturities to raise an exogenous revenue requirement. The ex-post incentive compatibility constraints introduce a role for gross financial positions, rendering financial structure non-neutral although markets are complete and taxes non-distorting. The optimal maturity structure minimizes the expected costs due to opportunistic behavior ex post. It matches the maturity of government assets (tax collections) and liabilities (debt redemption) and avoids dilution as well as debt rollovers

Keywords: Debt; maturity structure; no commitment; default (search for similar items in EconPapers)
JEL-codes: E62 F34 H63 (search for similar items in EconPapers)
Date: 2006-12-03
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More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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