TY  - JOUR
AU  - Helpman,Elhanan
TI  - Voluntary Debt Reduction:  Incentives and Welfare
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2692
PY  - 1990
Y2  - March 1990
UR  - http://www.nber.org/papers/w2692
L1  - http://www.nber.org/papers/w2692.pdf
N1  - Author contact info:
Elhanan Helpman
Department of Economics
Harvard University
1875 Cambridge Street
Cambridge, MA 02138
Tel: 617-495-4690
Fax: 617-495-7730
E-Mail: ehelpman@harvard.edu
AB  - 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.
ER  -