The role of lender behavior in international project finance

S Altug, S Ozler, M Usman

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A sovereign borrower seeks to raise funds internationally to finance a fixed-size project, which no single lender can finance alone. Lenders cannot lend more than their endowments, which are private information. A coordination failure arises; therefore, some socially desirable projects may not be financed, even if ex post feasible. There are multiple equilibria, and a conflict exists between lenders about which equilibrium to coordinate on. When endowments are volatile, some lenders prefer an equilibrium in which the project is financed with probability p < 1, even if ex post feasible. The government eliminates such equilibria by offering a sufficiently high return, only if endowment volatility is small.

Original languageEnglish
Pages (from-to)571-598
Number of pages28
JournalEconomic theory
Issue number3
Publication statusPublished - Apr 2002


  • international project finance
  • lender behavior
  • private information
  • coordination problem
  • subgame perfect equilibria
  • DEBT

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