Reputation and Partial Default
AbstractThis paper presents a continuous-time reputation model of sovereign debt allowing for both varying levels of partial default and full default. In it, a government can be a nonstrategic commitment type or a strategic opportunistic type, and a government's reputation is its equilibrium Bayesian posterior of being the commitment type. Our equilibrium has that for bond levels reachable by both types without defaulting, bigger partial defaults (or bigger haircuts for bond holders) imply higher interest rates for subsequent bond issuances, as in the data.
CitationAmador, Manuel, and Christopher Phelan. 2023. "Reputation and Partial Default." American Economic Review: Insights, 5 (2): 158-72. DOI: 10.1257/aeri.20210739
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- H63 National Debt; Debt Management; Sovereign Debt