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To pay or not to pay: A model of international defaults

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  • Daniel F. Kohler

Abstract

Most lenders in international financial markets accede to reschedule overdue payments when sovereign borrowers fail to meet repayment requirements rather than foreclose and force a default. This practice provides borrowers with strong incentives to avoid prompt payment and to sak rescheduling instead. Because lenders cannot distinguish between borrowers who are unable, and those who are merely unwilling, to repay the loan, they will agree to reschedule loans of borrowers who would choose to pay rather than face outright default. This paper augments the traditional lender-borrower model by explicitly considering rescheduling, in addition to default and repayment, and places it in a game theoretic context. It develops a theory of unwillingness to pay, as opposed to inability to pay, and derives strategies by which lenders can at least partially protect themselves against rescheduling requests by borrowers unwilling, but not unable, to fulfill their obligation.

Suggested Citation

  • Daniel F. Kohler, 1986. "To pay or not to pay: A model of international defaults," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 5(4), pages 742-760.
    • Handle: RePEc:wly:jpamgt:v:5:y:1986:i:4:p:742-760
    DOI: 10.1002/pam.4050050405
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    Cited by:

    1. Flores Zendejas, Juan, 2015. "Capital Markets and Sovereign Defaults: A Historical Perspective," Working Papers unige:73325, University of Geneva, Paul Bairoch Institute of Economic History.

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