Keywords: Institutions, Nash Bargaining Solution, Sovereign Debt, Third World Debt Crisis (original) (raw)

1997

Abstract

Annual Conference for helpful comments. I am especially grateful to Cheng-Zhong Qin for his advice. Any errors in this paper are my sole responsibility. Abstract: Sovereign states often borrow to finance their budgets in the modern era; in the medieval period kings had similar financing needs. Both types of sovereign borrowers share one characteristic: if they failed to fulfill their obligation, legal action is not one of lenders ’ options. However, as history has shown, some institutions evolved to secure lenders ’ rights. This paper provides a cooperative perspective of the negotiation between debtors and creditors in a twoperiod model using the Nash bargaining solution. Our results show that the initial debt and new loans are positively related, while the remaining debt and the interest rate are negatively related. These conclusions match the development of England after the Glorious Revolution. I.

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