TY  - JOUR
AU  - Bolton,Patrick
AU  - Oehmke,Martin
TI  - Credit Default Swaps and the Empty Creditor Problem
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15999
PY  - 2010
Y2  - May 2010
UR  - http://www.nber.org/papers/w15999
L1  - http://www.nber.org/papers/w15999.pdf
N1  - Author contact info:
Patrick Bolton
Columbia Business School
804 Uris Hall
New York, NY 10027
Tel: 212/854-9245
Fax: 212/854-8059
E-Mail: pb2208@columbia.edu

Martin Oehmke
Finance and Economics Division
Columbia Business School
3022 Broadway, Uris Hall 420
New York, NY 10027
Tel: 212/851-1804
Fax: 212/316-9180
E-Mail: moehmke@columbia.edu
AB  - Commentators have raised concerns about the empty creditor problem that arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy. We analyze this problem from an ex-ante and ex-post perspective in a formal model of debt with limited commitment, by comparing contracting outcomes with and without credit default swaps (CDS). We show that CDS, and the empty creditors they give rise to, have important ex-ante commitment benefits: By strengthening creditors' bargaining power they raise the debtor's pledgeable income and help reduce the incidence of strategic default. However, we also show that lenders will over-insure in equilibrium, giving rise to an inefficiently high incidence of costly bankruptcy. We discuss a number of remedies that have been proposed to overcome the inefficiency resulting from excess insurance.
ER  -