Reputation and Partial Default

PDF – Journal link – Code

Citation

Amador, Manuel and Christopher Phelan (2023): “Reputation and Partial Default”, AER:Insights, 5(2): 158-172.

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 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.

BibTeX

@article{AMPH2023,
	Author = {Amador, Manuel and Phelan, Christopher},
	Title = {Reputation and Partial Default},
	Journal = {American Economic Review: Insights},
	Volume = {5},
	Number = {2},
	Year = {2023},
	Month = {June},
	Pages = {158-72},
	DOI = {10.1257/aeri.20210739},
	URL = {https://www.aeaweb.org/articles?id=10.1257/aeri.20210739}}