An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the...

We evaluate the welfare benefits of international bankruptcy regimes in a political economy model of debt and default. We show that the socially optimal bankruptcy regime is likely to feature lower restructuring costs than the politically optimal bankruptcy regime. To the extent the current...