Coordination risk and the price of debt

Stephen Morris, Hyun Song Shin

Research output: Contribution to journalArticle

152 Scopus citations

Abstract

Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project. Recognition of this problem lies behind corporate bankruptcy provisions across the world, and it has been identified as a culprit in international financial crises, but has received scant attention from the literature on debt pricing. Without common knowledge of fundamentals, the incidence of failure is uniquely determined provided that private information is precise enough. This affords a way to price the coordination failure. Comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation.

Original languageEnglish (US)
Pages (from-to)133-153
Number of pages21
JournalEuropean Economic Review
Volume48
Issue number1
DOIs
StatePublished - Feb 1 2004

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Creditor coordination
  • Global games

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