Concern about the recent debt crisis in Europe, as well as debt repayment difficulties in many developing countries, was motivated by past experience with the ineffectiveness of negotiations to restructure sovereign debts: delays often exceed seven years, creditors appear to lose roughly 40% of the value of their claim, and debtors typically exit default as indebted as when they originally defaulted. The fact that creditors and the debtor have trouble reaching mutually beneficial agreements is an exmaple of a widespread phenomonon, found also in, for example, union-employer bargaining, congressional lobbying, and in international diplomacy such as the negotiation of environmental treaties. This project will advance our understanding of inefficiencies in bargaining over sovereign debt re¬structuring, and in bargaining more generally, in three ways. First, it will construct new estimates of indebtedness that allow us to more accurately map our theories of debt restructuring into observed data. These data will be of use to researchers studying sovereign debt more generally. Second, it will contruct estimates of the outcomes of this bargaining for what is close to a census of all sovereign defaults between 1980 and 2006. Third, these estimates of bargaining outcomes will be used to test the empirical validity of models that alternatively explain delays in bargaining as (1) a mechanism for signalling private information by the parties to the bargaining; (2) a result of the inability of the parties to honor the terms of the bargain; and (3) as a resu(t of collective action problems among parties to the bargain. Finally, the project advances the literature on the estimation of models of financial constraint by extending these techniques to models with defaultable debt contracts, and, in particular, to models that endogenize the punishment to default through bargaining. Broader Impact Both the pricing of debt, and assessments of the riskiness of debt to its holders, depend on forecasts of the likely recovery rate in the event of a default. By constructing data on recovery rates for all defaults since 1980, the project will enable more accurate pricing of debt. It will also allow regulators assessing the adequacy of capital levels of financial institutions to more accurately monitor the soundness of their own domestic financial systems. More accurate measures of indebtedness will also improve the predictive properties of our empirical models of sovereign default. This will also improve the pricing of sovereign debt, but perhaps more importantly will allow policy makers in both creditor countries and at supranational institutions to target assistance to the most vulnerable countries more promptly. Finally, by improving our understanding of the costs of default, this project will also aid policy makers in the appropriate design of interventions in the market for international debt. To the extent that the project identifies collective action problems as important in generating social inefficiencies, the models tested can be used as the basis for assessing the role of alternative contractual structures in reducing the cost of default ex post while still encouraging appropriate borrowing by countries ex ante.
