Reputation and Partial Default
17 Pages Posted: 5 Jul 2021 Last revised: 5 Jun 2023
Date Written: July 2021
Abstract
This 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 non-strategic 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.
Suggested Citation: Suggested Citation
Amador, Manuel and Phelan, Christopher, Reputation and Partial Default (July 2021). NBER Working Paper No. w28997, Available at SSRN: https://ssrn.com/abstract=3880230
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