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Title: |
Debt Buybacks and Forgiveness in a Model with
Voluntary Repudiation |
| Author: |
Kenen, Peter B. |
| Author
Affiliation: |
Princeton U |
| Source: |
International Economic Journal, Spring 1991, v. 5, no. 1, pp. 1-13 |
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Publication Date: |
Spring 1991 |
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Abstract: |
Debt reduction is usually analyzed in
models where default is involunatry and the gains from debt reduction
derive from various disincentives linked to a large debt overhang. This
paper uses a model default in which default is voluntary and shows that
debt reduction can be beneficial even in the absence of those
disincentives, by inducing debtors to renounce or postpone repudiation.
This is likely to happen when debts are large compared to the penalties
incurred by debtors if they repudiate. Furthermore, debtors can gain
from debt buybacks even after allowing fully for the opportunity costs
of using reserves for that purpose. |
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