Strategic Investment in a Debt Bargaining Framework
Eduardo R. Borensztein
This paper analyzes the strategic role of investment from a debtor
country's perspective. The framework is one in which, if the debtor
country is unable to meet debt obligations, a bargaining regime determines
the amount of debt repayment. In the context of a two-country real trade
model, debt repayment is equal to the trade surplus of the debtor. The
outcome of the bargaining game will therefore be dependent (among other
things) on the level of production in the debtor country. In this
framework, the paper shows that productive investment may increase or
decrease the bargaining power of the debtor country. This ambiguity
appears to be fairly robust.
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