NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

LDC Debt: Forgiveness, Indexation, and Investment Incentives

Kenneth A. Froot, David S. Scharfstein, Jeremy C. Stein

NBER Working Paper No. 2541 (Also Reprint No. r1362)
Issued in March 1988
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w2541

Published: "LDC Debt: Forgiveness, Indexation, and Investment Incentives." From Journal of Finance, Vol. 44, No. 5, pp. 1335-1350, (December 1989). citation courtesy of

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