Christian Opp - Rochester Simon Business School

"Private Renegotiations and Government Interventions in Debt Chains", with Vincent Glode

Abstract

We propose a model of strategic debt renegotiation in which businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a debt chain, gives rise to externalities, as a lender's willingness to provide concessions to its privately-informed borrower depends on how the lender's own liabilities are expected to be renegotiated. We highlight how government interventions that aim to prevent default waves should account for these private renegotiation incentives and their interlinkages. In particular, we contrast the consequences of targeted subsidies vs. debt reduction programs.

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