NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Voluntary Debt Reduction: Incentives and Welfare

Elhanan Helpman

NBER Working Paper No. 2692 (Also Reprint No. r1358)
Issued in August 1988
NBER Program(s):   ITI   IFM

In an economy with a debt overhang, investment depends on expected tax rates. On the other hand, expected tax rates depend on the debt's face value. Therefore investment depends on the face value of debt. I show that this may lead to a positive or negative association between debt and investment depending on the degree of international capital mobility and attitudes toward risk. There may also exist multiple equilibria; with high and low investment levels. The paper explores the desirability of debt reduction in this environment. First, it characterizes circumstances in which debt reduction is desirable from the collective point of view of the creditors. Second, it formulates the forgiveness decision as a noncooperative game among creditors and explores the scope for debt reduction as an outcome of this game.

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Document Object Identifier (DOI): 10.3386/w2692

Published:

  • International Monetary Fund Staff Papers, Vol. 36, No. 3, pp. 580-611,(September 1989). ,
  • Elhanan Helpman, 1989. "Voluntary Debt Reduction: Incentives and Welfare," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 580-611, September.

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