TY  - JOUR
AU  - Eaton,Jonathan
TI  - Sovereign Debt, Reputation, and Credit Terms
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3424
PY  - 1990
Y2  - August 1990
UR  - http://www.nber.org/papers/w3424
L1  - http://www.nber.org/papers/w3424.pdf
N1  - Author contact info:
Jonathan Eaton
Department of Economics
Penn State University
608 Kern Graduate Building
University Park, PA 16802-3306
Tel: (814) 865 - 8871
Fax: (814) 863 - 4775
E-Mail: jxe22@psu.edu
AB  - I develop a model in which sovereign debtors repay debt in order to maintain a reputation for repayment. Repayment gives creditors reason to think that the debtor will suffer adverse consequences if it defaults, so they continue to lend. I compare a situation in which competitive lenders earn a zero profit on each loan with one in which they can make long-term commitments to individual borrowers, so that the zero-profit condition applies only in the long run. In many circumstances a borrower benefits, ex ante, if lenders commit to denying credit to a borrower in default even if at that point a subsequent loan is profitable. Furthermore, a "debt overhang," while possibly altering credit terms, does not cause profitable investment opportunities to go unexploited.
ER  -