Dynamic Debt Runs

We analyze a new source of debt runs generated by the coordination problem between creditors whose debt contracts with a \u85rm mature at di¤erent times. In deciding whether to roll over his debt, each creditor faces the \u85rms future rollover risk with other creditors, i.e., the \u85rm fundamental could fall during his contract period, causing other maturing creditors to run and thus forcing the \u85rm to liquidate its asset at a \u85re sale price. We derive a unique monotone equilibrium, in which the creditors coordinate their asynchronous rollover decisions based on the publicly observable time-varying \u85rm fundamental. Preemptive debt runs occur through a rat race among the creditors in choosing higher and higher fundamental thresholds for rolling over their debt contracts. Our model captures a central element in many crisis episodeseven in the absence of any fundamental deterioration, changes in the volatility and liquidation value of the \u85rm asset could trigger preemptive runs by creditors on a solvent \u85rm. Such preemptive runs originate from the lack of commitment from future maturing creditors to roll over their debt contracts, rather than the lack of communication between creditors in static models of runs