DEBT RESTRUCTURING WITH MULTIPLE CREDITORS AND THE ROLE OF EXCHANGE OFFERS

Exploiting the analogy with the private provision of a public good, th is paper studies debt restructuring with an arbitrary number of credit ors using mechanism design. Creditors differ in the value they expect to receive in bankruptcy, and this value is private information. As wi th public goods, too little debt forgiveness is granted in equilibrium relative to the first best. Creditors are more willing to make conces sions under common values than under pure private values, an opposite phenomenon to the ''winners' curse'' in auctions. Exchange offers are an optimal restructuring scheme for the debtor, because they allow cre ditors to contribute to debt forgiveness at different levels. Journal of Economic Literature Classification Numbers: G34, G33. (C) 1996 Acad emic Press, Inc.