Domestic Creditor Rights and External Private Debt

Abstract

This paper unbundles institutions protecting domestic and foreign creditors' rights. We estimate a negative relation between the degree of domestic rights protection and the external stock of private nonguaranteed debt in 85 developing countries. A supply-side explanation is that strong domestic protection supports reliable outside financing options for potential external debt defaulters; foreign investors anticipating this would tighten credit constraints ex ante. Then we formalize the argument in a private borrowing and default model, and show that centralization is no longer necessarily welfare superior.