Bank Heterogeneity, Reputation and Debt Renegotiation

This paper examines a process of debt renegotiation in which banks possess divergent interests and there is asymmetric information. The authors assume that large banks must exert pressure on small banks in order to obtain participation of these in the provision of new money and in debt forgiveness. Making use of a reputational model, they argue that the effect of asymmetric information as to the amount of pressure that large banks can exert on small banks makes the debtor countries worse-off than absent these asymmetries in information. This also provides a rationale for the growing popularity of exit bonds. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.