Publication Date: December 1999
Revision Date: February 2002
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.
Common knowledge, debt pricing, credit risk, default
See CFP: 1128