Debt with potential repudiation

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Abstract

Lending across national boundaries is different from lending within national boundaries because of the difficulty of imposing legal sanctions. This paper examines a simple model of international lending where the borrower can repudiate, without legal sanction, if this is to his advantage. The model has an infinite time horizon and it is assumed the borrower has an i.i.d. income stream. It is shown that, although debt is initially restricted, in the long run consumption is completely stabilised.
Original languageEnglish
Pages (from-to)1099-1109
Number of pages11
JournalEuropean Economic Review
Volume34
Issue number5
Publication statusPublished - Jul 1990

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