Competition for Default∗
نویسندگان
چکیده
This paper analyzes Markovian equilibria in a model of strategic lending where (i) agents cannot commit to long term contracts, (ii) contracts are incomplete, and (iii) incumbent lenders can coordinate their actions. The structure of the credit market keeps changing over time endogenously along every equilibium path. After a sequence of bad shocks the borrower in a competitive market accumulates debt overhang and the incumbent lenders exercise monopolistic power. Even though the incumbents could maintain this power forever, they find it profitable to let the borrower regain access to the competitive market after a sequence of good shocks. Equilibria are computed numerically and their attributes are qualitatively consistent with numerous known empirical facts on sovereign lending. In addition, the model predicts that the borrower who accumulated debt overhang only regains access to the competitive credit market after good shocks. This is also shown to be consistent with data on emerging market economies.
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