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International Lending with Moral Hazard and Risk of Repudiation

Working Paper 381 | Published November 1, 1987

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International Lending with Moral Hazard and Risk of Repudiation

Abstract

This paper examines the optimal debt contract between lenders and a sovereign borrower when the borrower is free to repudiate the debt and when his decision to invest or consume borrowed funds is unobservable. We show that recurrent debt crises are a necessary part of the incentive structure which supports the optimal pattern of lending.


Published in _Econometrica_ (vol. 59, no. 4, July 1991, pp. 1069-1089), https://doi.org/10.2307/2938174.