Research
Recovery Before
Redemption? A Theory of Delay in
Sovereign Default, with Mark L.J
Wright [Revise and Resubmit, Econometrica]
Negotiations
to restructure sovereign debts are protracted, taking on average almost
8 years to complete. In this paper we construct a new database (the most
extensive of its kind covering ninety recent sovereign defaults) and use it to
document that these negotiations are also ineffective in both repaying
creditors and reducing the debt burden countries face. Specifically, we find
that creditor losses average roughly 40 per-cent, and
that the average debtor exits default more highly indebted than when they
entered default. To explain this apparent large inefficiency in negotiations,
we present a theory of sovereign debt renegotiation in which delay arises from
the same commitment problems that lead to default in the first place. A debt
restructuring generates surplus for the parties at both the time of settlement and
in the future. However, a creditor's ability to share in the future surplus is
limited by the risk that the debtor will default on the settlement agreement.
Hence, the debtor and creditor find it privately optimal to delay restructuring
until future default risk is low, even though delay means some gains from trade
remain unexploited. We show that a quantitative version of our theory can
account for a number of stylized facts about sovereign default, as well as the
new facts about debt restructurings that we document in this paper. Finally, we
argue that our findings shed light on the existence of delays in bargaining in
a wider range of contexts.
Detrended Total Factor Productivity (TFP), net of changes
in
capital utilization, fell 2.6% after the Korean 1997
financial
crisis. Detrended real GDP per
working age person fell by 10.1%.
We construct a
two-sector small open economy model that can
account for 40% of the fall in TFP in response to a
sudden stop
of capital inflows and an increase in international
interest
rates. The model also accounts for 55% of the fall in
GDP.
Empirically,
the fall in TFP follows a reallocation of labor from
the more productive manufacturing sector to the less
productive
service sectors and to agriculture. The model has a consumption
sector and an investment sector. The reallocation of
labor in the
data corresponds to a movement from the investment
sector to the
consumption sector in the model. The sudden stop raises the
cost of working capital needed
to employ labor and use materials. We show that working capital requirements
fall disproportionally
on the investment sector.
Published as:
Benjamin,
David and Meza, Felipe (2009) "Total Factor
Productivity and Labor Reallocation: The Case of the Korean
1997 Crisis," The B.E. Journal of Macroeconomics: Vol. 9
:
Iss. 1 (Advances), Article 31.
Winner: Arrow Prize
Formal versus Informal
Default in Consumer Credit, with Xavier Mateos-Planas
[Job Market Paper]
This paper studies
informal default in consumer credit as the start of a process of negotiation
with the lender. We consider an economy with uninsurable individual risk where
households in debt have also the option of declaring formal bankruptcy. In a calibrated version of the model,
informal defaulters are notably wealthier, have lower income, and hold more
debt than formal defaulters, an implication consistent with the evidence. Quick
settlements are achieved often, with limited discounts. Protracted negotiations
feature individuals disaving
before they reach agreement or declare bankruptcy. Allowing for negotiations
raises default rates but substantially improves welfare as it provides greater
insurance opportunities. Thus lowering the cost of informal default, as opposed
to that of formal default, raises welfare and dampens consumption volatility. A
tighter exemption improves welfare as the bargaining option mitigates the
adverse effect on insurance via formal bankruptcy. Attempts at limiting
collection outside bankruptcy reduce the incidence of bankruptcy but lower
overall welfare.
I combine two
previously separate strands of the bargaining literature to present a bargaining
model with both one-sided private information and a majority vote for proposals
to go into effect. I use this model to
show that the
I consider the
bargaining that occurs in bankruptcy between an informed firm and a set of
uninformed creditors over a set of new debt contracts. The agents have an infinite horizon to
bargain and cannot commit to a schedule of future offers. If individual creditors can be treated
differently and a majority vote is required for the acceptance of new debt
contracts, adding creditors increases the probability of reaching agreement by
the end of any given period. The
The
Productivity
in Economies with Financial Frictions: Facts and a Theory, with Felipe
Meza
We document and account for two facts regarding the relation between
international interest rates and total factor productivity (TFP) in a sample of
developing countries. First, there is a negative correlation between both variables
at quarterly frequency. Second, the share of agricultural labor
and interest rates are positively correlated, whereas the share of agricultural
labor and TFP are negatively correlated.
Manufacturing labor shows opposite correlations.
These relationships are particularly strong in the aftermath of financial
crises. We then construct a model in which the presence of costly
intermediation can produce such relationships. We show that, after increases in
interest rates, a requirement to intermediate factors of production in high
productivity sectors, like manufacturing, causes resources to leave these
sectors. Resources end up in low productivity sectors, like agriculture, where
intermediation is cheaper. This lowers aggregate productivity. We show that the
channel we identify is quantitatively important in the case of
Ongoing
projects not ready to circulate
A Quantitative
model of HAMP
In this paper
we quantitatively analyze the influence of the HAMP program on the mortgage
market in a model where agents renegotiate over mortgages subject to default
risk. The HAMP program contained
measures designed to facilitate the renegotiation of mortgages where previously
it was structurally unlikely to occur.
The HAMP program also contained rewards to creditors and debtors for
successfully concluded renegotiations.
In our model
the value of housing assets is closely related to changes in income but is also
determined in the market. Housing assets
can be seized if foreclosure procedures are began thus
housing prices determine agents ability to commit to repay mortgages and thus
the likely success of negotiations for new mortgages. In term the ability of negotiations to
terminate without foreclosure affects housing prices which creates a vicous cycle. We
show that without any externality there is room for a policy to subsidize
agreements to avoid the excessive amount of foreclosures that occur in
equilibrium. With the feedback through
asset prices we show that this argument is strengthened. We create a quantitative measure of the
affect of HAMP on foreclosures and asset prices. We also construct the first best policy.
Bankruptcy,
Industrial Policy and Development in a Model of Limited Commitment
We ask how in
this paper how commitment in negotiations between labor and its creditors
affects the efficacy of bankruptcy policy when reorganizing firms requires a
change in
the labor structure of firms but the current labor
has a claim on the future profits of firms that emerge from bankruptcy either
from priority or because labor is necessary for the success of the firm. We show that without commitment firms may be
liquidated at two great a rate or that reorganizations
may occur too slowly. We show that this
has implications for aggregate productivity.
We show that cramdowns do not fix this policy
as this encourages too many firms to enter Chapter 7. We show further that this dynamic creates a role for
industrial policy similar to the recent auto bailouts in which management
resigns in exchange for direct worker subsidies.
How
Intrusive Should the Court System Be?
I document the
correlation between the movement from negligence to strict liability and the
growth of inefficiencies in the legal system in which I include legal
fees. I argue that some movement in this
direction is optimal in double moral hazard environment if both the consumers’
and producers’ costs of preventing accidents fall simultaneously. The model posits that the court may act as a
“budget breaker” if both the producers and consumers are capable of preventing
accidents.
Available on Request