Suchergebnisse

If consumer valuations change over time, then secondary‐market frictions may raise monopoly profits and cause durability to be distorted away from the cost‐minimizing level. A monopolist who favors such frictions overinvests in durability, but planned obsolescence instead may be preferred when market frictions exist but a monopolist wishes they did not. Evidence from the book market is presented.

Conventional wisdom says that, in the absence of default penalties, sovereign risk destroys all foreign asset trade. We show that this conventional wisdom rests on one implicit assumption: that assets cannot be retraded in secondary markets. Without this assumption, foreign asset trade is possible even in the absence of default penalties. This result suggests a broader perspective regarding the origins of sovereign risk and its remedies. Sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly. To reduce its effects, one can either increase default penalties or improve the working of secondary markets. (JEL F34, G12, G15)

Conventional wisdom views the problem of sovereign risk as one of insufficient penalties. Foreign creditors can only be repaid if the government enforces foreign debts. And this will only happen if foreign creditors can effectively use the threat of imposing penalties to the country. Guided by this assessment of the problem, policy prescriptions to reduce sovereign risk have focused on providing incentives for governments to enforce foreign debts. For instance, countries might want to favor increased trade ties and other forms of foreign dependence that make them vulnerable to foreign retaliation thereby increasing the costs of default penalties.