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Reputation with multiple relationships: reviving reputation models of debt

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  • Harold L. Cole
  • Patrick J. Kehoe

Abstract

A traditional explanation for why sovereign governments repay debts is that they want to keep a good reputation so they can easily borrow more. Bulow and Rogoff have challenged this explanation. They argue that, in complete information models, government borrowing requires direct legal sanctions. We argue that, in incomplete information models with multiple trust relationships, large amounts of government borrowing can be supported by reputation alone.

Suggested Citation

  • Harold L. Cole & Patrick J. Kehoe, . "Reputation with multiple relationships: reviving reputation models of debt," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:137
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    References listed on IDEAS

    as
    1. Harold L. Cole & James P. Dow & William B. English, . "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report, Federal Reserve Bank of Minneapolis.
    2. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
    3. Drew Fudenberg & David K. Levine, 2008. "Reputation And Equilibrium Selection In Games With A Patient Player," World Scientific Book Chapters, in: Drew Fudenberg & David K Levine (ed.), A Long-Run Collaboration On Long-Run Games, chapter 7, pages 123-142, World Scientific Publishing Co. Pte. Ltd..
    4. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
    5. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-1089, July.
    6. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    7. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    8. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    9. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-538, June.
    10. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
    11. Drew Fudenberg & David M. Kreps, 1987. "Reputation in the Simultaneous Play of Multiple Opponents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 541-568.
    12. Raquel Fernandez & Robert W. Rosenthal, 1990. "Strategic Models of Sovereign-Debt Renegotiations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 331-349.
    13. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
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    Cited by:

    1. Mohr, Ernst & Thomas, Jonathan P., 1998. "Pooling sovereign risks: The case of environmental treaties and international debt," Journal of Development Economics, Elsevier, vol. 55(1), pages 173-190, February.
    2. Michael D. Bordo & Finn E. Kydland, 1990. "The Gold Standard as a Rule," NBER Working Papers 3367, National Bureau of Economic Research, Inc.
    3. Harold L. Cole & James P. Dow & William B. English, . "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report, Federal Reserve Bank of Minneapolis.

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