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Bargaining over debt rescheduling

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  • Prokop, Jacek

Abstract

The objective of this paper is to investigate the bargaining over debt rescheduling between a sovereign borrower and a foreign lender in a more general framework than in the preceding literature. We propose a model in which the impact of the bargaining power of the creditor and the debtor can be analyzed in the situation of debt overhang. The concept of Nash bargaining solution is applied to predict the behaviour of international financial market’s participants. The extended framework of debt renegotiations allows to identify several possible equilibria that could serve as potential resolutions of the debt overhang problem. In an illustrative numerical example, we show that a significant level of forgiveness on the part of the lenders is indispensible in the process of bargaining over debt rescheduling. However, the actual size of the forgiveness varies with the specific distribution of the bargaining power between the debtor and the creditor.

Suggested Citation

  • Prokop, Jacek, 2012. "Bargaining over debt rescheduling," MPRA Paper 44315, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:44315
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    References listed on IDEAS

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    Cited by:

    1. Mattia Osvaldo Picarelli, 2016. "Debt Overhang and Sovereign Debt Restructuring," Working Papers 9/16, Sapienza University of Rome, DISS.

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    More about this item

    Keywords

    debt rescheduling; foreign borrowing; international debt overhang; bargaining;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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