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LDC Debt: Forgiveness, Indexation, and Investment Incentives

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  • Kenneth A. Froot
  • David S. Scharfstein
  • Jeremy C. Stein

Abstract

We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment, This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.

Suggested Citation

  • Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1988. "LDC Debt: Forgiveness, Indexation, and Investment Incentives," NBER Working Papers 2541, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2541
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    References listed on IDEAS

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    1. Martin Feldstein, 1988. "International Economic Cooperation," NBER Books, National Bureau of Economic Research, Inc, number feld88-4.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    3. Lessard, Donald R., 1987. "Recapitalizing the third world : toward a new vision of commercial financing for less developed countries," Working papers 1946-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    Cited by:

    1. Guido Sandleris & Filippo Taddei, 2007. "Indexed Sovereign Debt: a Survey and a Framework of Analysis," Carlo Alberto Notebooks 66, Collegio Carlo Alberto.
    2. Peter Nunnenkamp, 1993. "Financing the global environment," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 28(3), pages 132-137, May.
    3. Allen, Franklin & Santomero, Anthony M., 1997. "The theory of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1461-1485, December.
    4. repec:dau:papers:123456789/4089 is not listed on IDEAS
    5. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
    6. Fernando Ossa, 1988. "El Sistema Monetario Internacional en los Últimos Veinticinco Años," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 25(76), pages 405-430.
    7. Nunnenkamp, Peter, 1989. "Bank lending to developing countries in the 1980s: an empirical test of major hypotheses on voluntary and involuntary lending," Kiel Working Papers 354, Kiel Institute for the World Economy (IfW Kiel).
    8. Joseph Atta-Mensah, 2004. "Commodity-Linked Bonds: A Potential Means for Less-Developed Countries to Raise Foreign Capital," Staff Working Papers 04-20, Bank of Canada.
    9. Nunnenkamp, Peter & Stüven, Volker, 1991. "How to reduce uncertainty in international capital flows? The investor's view," Open Access Publications from Kiel Institute for the World Economy 2012, Kiel Institute for the World Economy (IfW Kiel).
    10. Nunnenkamp, Peter, 1992. "International financing of environmental protection: North-South conflicts on concepts and financial instruments and possible solutions," Kiel Working Papers 512, Kiel Institute for the World Economy (IfW Kiel).

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