LDC Debt: Forgiveness, Indexation, and Investment Incentives

  • Author(s): KENNETH A. FROOT, DAVID S. SCHARFSTEIN, JEREMY C. STEIN
  • Published: Apr 30, 2012
  • Pages: 1335-1350
  • DOI: 10.1111/j.1540-6261.1989.tb02656.x

ABSTRACT

We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment. This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Search Tips

Members' Login

Credentials

Members' Options

Site Footer

View Mobile Version