Document Type
Discussion Paper
Publication Date
12-1-1999
CFDP Number
1241R
CFDP Revision Date
2002-02-01
CFDP Pages
28
Abstract
Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project. Recognition of this problem lies behind corporate bankruptcy provisions across the world, and it has been identified as a culprit in international financial crises, but has received scant attention from the literature on debt pricing. Without common knowledge of fundamentals, the incidence of failure is uniquely determined provided that private information is precise enough. This affords a way to price the coordination failure. Comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation.
Recommended Citation
Morris, Stephen and Shin, Hyun Song, "Coordination Risk and the Price of Debt" (1999). Cowles Foundation Discussion Papers. 1491.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1491