Tuesday, September 10, 2019 - 4:10pm to 5:45pm
Location: 
Room 219, Flavelle Building, 78 Queen's Park

LAW & ECONOMICS COLLOQUIUM

Mitu Gulati
Duke University School of Law

Pricing Collective Action Clauses:  Where’s the Hidden Holdout?

Tuesday, September 10, 2019
4:10 - 5:45
Room FL219 (John Willis Classroom)
78 Queen's Park

A creditor who asks for stronger enforcement rights should accept a lower interest rate on her lending to reflect these rights. Over a dozen studies attempting to document this basic relationship in the context of a key provision in sovereign bonds, the collective action clause, have failed. We conjecture that this failure is because whether pricing of rights in fact occurs turns on whether these enforcement rights require collective action and the market perceives the presence of a specialist creditor who is willing to serve as a collectivizing agent and litigate the relevant right (as opposed to where such specialists are hidden). Using data from Venezuela’s ongoing debt crisis, we find that in situations where the market identifies the presence of such a creditor, the rights get priced. The timing of when such terms are priced, is critical for social welfare. Because clauses that provide strong enforcement rights are not priced earlier, at the time the sovereign issues the bonds, the sovereign has little incentive to adopt such terms even if the terms increase overall social welfare by reducing debtor moral hazard, including the risk of profligate spending. 

Mitu Gulati is a professor at Duke University.  His research interests are currently in the historic evolution of concepts of sovereign immunity and the role that law can play as a symbol.  He has authored articles in the Journal of Legal Studies, the Review of Finance and Law and Social Inquiry.  He has won no awards, other than a second place finish in the fancy dress competition in 3rd grade (photo not available). 

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