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Renegotiation and Coordination: Sovereign Default in 1980s and 1990s

Author

Listed:
  • Jing Zhang

    (University of Michigan)

  • Yan Bai

    (Arizona State University)

Abstract

In this paper we study these features using a game-theoretical model with coordination problems and repeated renegotiations. The key difference between 1980s and 1990s is the existence of secondary markets for bonds in 1990s. The markets play two roles. First, the liquidity of bonds lowers the reservation values of current bondholders. Second, the prices offer higher precision of the signal on the reservation values of bondholders. The lower reservation value generates higher hair cut rates in the bond debt relative to the bank debt. The higher precision of signal produces a shorter period of renegotiation in the bond debt relative to the bank debt. There exists a unique equilibrium in the economy with a large number of small bondholders in that only a fraction of them choose to hold the bonds given the others accept the deal proposed by the government.

Suggested Citation

  • Jing Zhang & Yan Bai, 2008. "Renegotiation and Coordination: Sovereign Default in 1980s and 1990s," 2008 Meeting Papers 625, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:625
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