Court-ordered debt payments have become a national problem in Brazil. On one hand, states and municipalities refused paying this debt, claiming limited revenue. On the other, creditors demanded the nation to secure their judicial right. A new constitutional amendment passed in 2009 establishes a fixed yearly budget for debt payment and debt-reduction auctions to decide who should first receive payment. This article presents an economic analysis of the bill and shows that it satisfies states and municipalities participation constraints. Moreover, it proposes and analyzes a generalized-Vickrey debt-reduction auction that satisfies creditors' participation constraints, reduces debt and the time needed for total debt payment.
court-ordered debt payments; public finance; mechanism design; auctions
