NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

LDC Debt in the 1980s: Risk and Reforms

Jeffrey Sachs

NBER Working Paper No. 861
Issued in February 1982
NBER Program(s):   ITI   IFM

With the rapid increase in LDC indebtedness in the recent decade, the issues of creditworthiness and country risk have gained new importance. This paper offers a theoretical and historical analysis of international capital markets in the presence of default risk. The theoretical model suggests the possibility of a prisoners' dilemma in the loan market, in which a country's dominant noncooperative strategy is to default, though a welfare-improving cooperative strategy is available. The historical analysis suggests that the IMF may play a key role in guiding creditors and debtor nations to reach cooperative solutions.

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Document Object Identifier (DOI): 10.3386/w0861

Published: LDC Debt: Problems and Prospects", P. Watchel Ed., Crisis in Economic and Financial Structure, (Lexington Books, 1982)

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