TY  - JOUR
AU  - Paasche,Bernhard
AU  - Zin,Stanley E.
TI  - Competition and Intervention in Sovereign Debt Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8679
PY  - 2001
Y2  - December 2001
UR  - http://www.nber.org/papers/w8679
L1  - http://www.nber.org/papers/w8679.pdf
N1  - Author contact info:
Stanley E. Zin
Department of Economics
Leonard N. Stern School of Business
New York University
44 West 4th Street, Suite 7-91
New York, NY 10012-1126
Tel: 212/998-0121
E-Mail: stan.zin@nyu.edu
AB  - We investigate markets for defaultable sovereign debt in which even though there are many identical lenders and symmetric information (including no hidden actions), perfect competition does not obtain. When a private lender allows a sovereign country to increase its level of indebtedness, that lender implicitly imposes a default externality on others who have lent to that sovereign. That is, in the case where the borrower would be able to pay back the first loan in the absence of a second loan, the borrower may have a strong incentive to take both loans and default on both loans. When a lender has  no control over the actions of other lenders, they must anticipate this behavior and devise a lending strategy that is consistent with the strategies not only of the sovereign borrower, but also of other lenders. We develop a model of this strategic lending behavior in the presence of default, and show that even though there are many competing lenders, the perfectly competitive outcome does not necessarily obtain. Moreover, the equilibrium can result in monopoly-like outcomes in prices and quantities. We also study the consequences of intervention in these markets by a seemingly benevolent international financial institution, and find that these interventions, though well-intentioned, can in some cases be welfare reducing for sovereign countries and welfare improving for private lenders.
ER  -