Staff Report 137

Reputation With Multiple Relationships: Revising Reputation Models of Debt

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
Harold L. Cole

Published March 1, 1991

Abstract
A traditional explanation for why sovereign governments repay debts is that they want to keep a good reputation so they can easily borrow more. Bulow and Rogoff have challenged this explanation. They argue that, in complete information models, government borrowing requires direct legal sanctions. We argue that, in incomplete information models with multiple trust relationships, large amounts of government borrowing can be supported by reputation alone.


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