Incentives and Insurance in International Financial Markets

by Daniel F. Kohler

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This Note lays the theoretical groundwork for estimates of resource flows to the Communist World resulting from Western trade policy. Section II considers the strategic behavior of borrowers and lenders and the consequences of this behavior for the probability of a loss occurring. Section III analyzes the insured lender's incentives more closely, including self-insured lenders, external insurance, and lender-specific risks and risk perceptions. The last section considers the policy implications of the findings, especially with respect to Western loans to the East.

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