Credibility for sale

Dellas, Harris; Niepelt, Dirk (30 October 2013). Credibility for sale (Meeting papers 12). Society for Economic Dynamics

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We develop a model where a sovereign’s incentive to repay its debt depends on the identity of its creditors. Higher exposure to official lenders improves incentives and thus credibility, for instance, because default would jeopardize the benefits from membership in a club (such as EU or EMU). But higher exposure also carries costs, because of reduced flexibility ex post and because official lenders may collude to extract rents. We characterize the equilibrium composition of debt across creditor groups as well as equilibrium debt prices. Our model can account for an important— and still unexplained—feature of sovereign debt crises: Official lending to sovereigns takes place only in times of debt distress and carries a favorable rate. It also offers a novel perspective on the interaction between deficits, debt overhang and the availability of official funds in determining default risk.

Item Type:

Working Paper


03 Faculty of Business, Economics and Social Sciences > Department of Economics
03 Faculty of Business, Economics and Social Sciences > Department of Economics > Institute of Economics > Macro and National Economics

UniBE Contributor:

Dellas, Harris and Niepelt, Dirk


300 Social sciences, sociology & anthropology > 330 Economics


Meeting papers


Society for Economic Dynamics




Dirk Niepelt

Date Deposited:

26 May 2014 11:09

Last Modified:

10 Dec 2014 10:22

Uncontrolled Keywords:

Sovereign debt, official lending, default, enforcement

JEL Classification:

F34, H63




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