Clark, Derek John (1992) Rent-seeking, learning and the dynamics of reputation in the international credit market. PhD thesis, University of Warwick.

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Abstract

Most
reputation-based models of sovereign
debt
assume that a
default
on a
loan
obligation
leads to the imposition
of an immediate
and permanent credit embargo.
The first
part of this thesis
examines the case
in
which the length
of exclusion
is
endogenously determined
and may consequently
be finite
or
infinite. In this
way,
lulls
in
activity
followed by
enthusiastic
lending in
the
international
credit market can
be
modelled.
Additionally,
examining
the
optimal exclusion strategy of the creditor
allows
investigation
of the consequences of
`excusing' default. By
not punishing a
defaulter immediately, it is
more
likely
that a complete
loan
embargo will
be imposed
in
the
future. The
effect of excusing
default
on the expected value of the credit
relationship to the country
is
also examined.
A
negative externality can arise
in the relationship
between
a sovereign
borrower
and a creditor
due to the existence of countries which repeatedly
default
on
their debt:
a
default by
one country may make the creditor more cautious
in lending
to
others.
The
effects of this externality are examined
in
a
dynamic
model
in
which
the bank does
not
know
the type of customer
it faces, but
can
learn its identity
over
time.
The
equilibrium actions of the players then
depend
crucially on the
borrower's
reputation
for
creditworthiness.
Even
a country which
is
not an
inherent defaulter
may
be tempted to repudiate
its debt
obligations with
this type of
incomplete information
structure.
Each
successive
default
causes reputation
to
fall
until a critical
level is
surpassed, at which point a permanent
lending
embargo
is imposed. In this dynamic
model of
debtor
reputation,
borrowers face
an additional problem as they do
not
always possess the
funds
needed to make a repayment and thus reveal their type.
In
recognizing that borrowing
countries can
be different by
nature, the final
part of this thesis examines an economy which
is driven
to
borrow
externally as an
endogenous outcome of a political system
in
which
interest
groups
lobby
political
parties.
The
amount of
borrowing is
shown
to
depend
upon the number of
redistributive policies the
parties can use and the attitude of the
voters to external
borrowing. A
proposal
is
put
forward for linking debt forgiveness in
this type
of
lobbying
economy to the level
of rent-seeking carried out
by
the interest
groups.
lt
is demonstrated
that this proposal
is
capable of
improving
the
well
being
of the
ordinary citizens of the economy who share the repayment cost
but
may not enjoy the
benefits
of external
borrowing.

Item Type:	Thesis (PhD)
Subjects:	H Social Sciences > HB Economic Theory
Library of Congress Subject Headings (LCSH):	Credit, Credit -- Management, Debts, Public , Economics -- Political aspects
Official Date:	December 1992
Institution:	University of Warwick
Theses Department:	Department of Economics
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Thomas, Jonathan ; Cripps, Martin
Sponsors:	Economic and Social Research Council (Great Britain) (ESRC) (D00428822032) ; University of Warwick ; University of Wisconsin
Extent:	vii, 226 leaves
Language:	eng

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