Voluntary Debt Reduction: Incentives and Welfare

Peter Wickham, Jacob Frenkel, and Michael Dooley
Published Date:
March 1989
    • ShareShare
    Show Summary Details

    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. The paper shows 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.

      You are not logged in and do not have access to this content. Please login or, to subscribe to IMF eLibrary, please click here

      Other Resources Citing This Publication