Debt, debt relief, and growth: a bargaining approach

Daniel Cohen and Thierry Verdier

No 762, Policy Research Working Paper Series from The World Bank

Abstract: This report compares and identifies two ways that Governments can "up-front" the adjustment effort: accumulating reserves; and engaging in an equity swap. The authors compare these methods with a constant rescheduling agreement which assumes that no reserves can be accumulated and that tax collections go to the creditors. The paper analyzes the outcome of a "memoryless" rescheduling agreement. The model exhibits two potential Laffer curves effects. In one, the lenders would want to reduce the vulnerability of the debtor to their sanctions (that is, required taxation). In the other, the debtor would actually prefer less growth than more. The role of reserves is studied and it is determined that their use can improve a country's welfare, over the case of the rescheduling agreement. The country must, however, be able to commit itself to a tax rate before negotiations start. Otherwise, reserves are useless. Debt-equity swaps are also studied. The outcome - always Pareto - dominates the outcome of the rescheduling equilibrium. Banks always gain a fraction of the country's capital above the share of output that they gain in the rescheduling equilibrium. Thus, banks are relatively less "impatient" than the country to reach a debt-relief agreement.

Keywords: Economic Theory & Research; Environmental Economics & Policies; Strategic Debt Management; Banks & Banking Reform; Financial Intermediation (search for similar items in EconPapers)
Date: 1991-09-30
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Related works:
Working Paper: Debt, debt relief and growth: a bargaining approach (1991)
Working Paper: Debt, Debt relief and Growth: a Bargaining Approach (1991)
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