Glode and Opp, ‘Renegotiation in Debt Chains’

ABSTRACT
The COVID-19 pandemic has dramatically affected businesses worldwide, prompting a search for interventions aimed at avoiding default waves. We develop a tractable model of debt renegotiation under private information to shed light on a key challenge to these efforts: businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a debt chain, implies that a lender’s willingness to provide concessions to a borrower depends on how this lender’s own liabilities are expected to be renegotiated. Our analysis reveals how targeted government subsidies, mandated debt reductions, and incentives for early renegotiation can affect default risk throughout the whole debt chain.

Glode, Vincent and Opp, Christian C, Renegotiation in Debt Chains (August 6, 2020).

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