The pure theory of country risk

Jonathan W. Eaton, Mark Gersovitz, Joseph E. Stiglitz

Research output: Contribution to journalArticle

236 Scopus citations

Abstract

This paper attempts to survey, and to put into perspective, recent literature that has analyzed the nature of credit relations between developed and developing countries. This analysis has made use of recent advances in the economics of information and strategic interaction. Traditional concepts of solvency and liquidity are of little help in understanding problems of sovereign debt. Creditors do not have the means to seize the assets of a borrower in default. Hence the borrower's net worth is not relevant in determining the amount of a loan that can be recovered. A borrower who is expected eventually to repay his debts should be able to borrow to meet any current debt-service obligations. A problem that is essential to a theory of international lending is that of enforcement. The difficulty is one of ensuring that the two sides of a loan contract adhere to it, in particular that the borrower repays the lender and the lenders can commit themselves to penalize the borrower if he does not.

Original languageEnglish (US)
Pages (from-to)481-513
Number of pages33
JournalEuropean Economic Review
Volume30
Issue number3
DOIs
StatePublished - Jan 1 1986

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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