Private International Debt with Risk of Repudiation

Abstract

The risk of repudiation plays a central role in determining the size of international capital flows. In this paper I compare a centralized arrangement for international debt, where only governments borrow and lend internationally, with a decentralized arrangement, where individual borrowers have access to international capital markets. I show that a centralized setup allows more international risk sharing and higher welfare than a decentralized setup. That is, there is a positive role for government regulation of international borrowing.