| The three essays of this dissertation take historical, theoretical, and empirical approaches to examine three topics related to debt in Latin America--the costs of default on external debt, the cause and effects of domestic private debt overhang, and corporate overindebtedness in Colombia in the early 1980's. Essay 1, a joint paper with Jeffrey Sachs, provides empirical comment on a central part of the external debt literature dealing with the willingness-to-pay of borrowers; it investigates the ex post costs of default from the borrower's perspective through analysis of the patterns of actual default and repayment on foreign bond contracts of five Latin American countries in the interwar period. By analyzing the outcomes of defaults during the last episode of the breakdown of sovereign lending, this essay also provides commentary on the contemporary choice of default against the background of today's structure of debt contracts. The other two essays, theoretical and empirical work on domestic debt overhang, speak to the second issue in the external debt literature, the resolve of lenders to enforce contracts, and also build on the common theoretical roots of asymmetric information in financial markets; they incorporate insights and techniques developed in the external debt overhang literature, and they also draw on new work on the macroeconomic implications of imperfect information in domestic credit markets. Essay 2 specifies the influence of debt burden on creditor response by modelling domestic debt overhang for a small open economy. It shows that with non-contingent debt contracts (in the form of unsecured bank loans), the domestic debt burden of firms has important incentive effects on domestic creditors, and it illuminates the potential real macroeconomic impact of financial conditions. Essay 3 develops evidence on this influence of existing debt burdens for the case of Colombia; a panel of firms over the period 1974 to 1983 is examined for indications of corporate overindebtedness and resultant misallocation of bank credit as predicted by the model of Essay 2. |
