Defaults and Interest Rates in International Lending

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" Defaults and Interest Rates in International Lending "
Chowdhry, Bhagwan

Document Type	:	AL
Record Number	:	912438
Doc. No	:	LA4nq6p3nz
Title & Author	:	Defaults and Interest Rates in International Lending [Article]\ Chowdhry, Bhagwan
Date	:	1991
Title of Periodical	:	UCLA
Abstract	:	Since lenders cannot observe the riskiness of the projects borrowers could choose, interest rates alone cannot be used as an instrument to discipline the borrowers. A credible threat to exclude borrowers who default more than a certain number of times from participating in the capital markets makes international debt contracts incentive compatible. Larger borrowers, since they get fewer chances to default, choose safer proejcts and are therefore charged smaller interest rates. Also, borrowers, after each successive default swtich to safer and safer projects which may result in smaller and smaller interest rates. This paper provides empirical evidence supporting these two predictions.