Working Paper: NBER ID: w2597
Authors: Raquel Fernandez; Robert W. Rosenthal
Abstract: The process of debt-rescheduling between a creditor and a sovereign (LDC) debtor is modeled as a noncooperative game built on a one-sector growth model. The creditor's threat to impose default penalties is ignored here as inherently incredible; instead, the debtor's motivation for repayment is to reap benefits from attaining an improved credit standing in international capital markets. The creditor can forgive portions of the outstanding debt so that a real-time bargaining process results with concessions being in the form of debt-service payments by the debtor and debt forgiveness by the creditor. Subgame-perfect equilibria of the game are characterized the main finding is that these all result in Pareto optima in which the creditor extracts all the surplus.
Keywords: sovereign debt; debt renegotiation; noncooperative game theory; creditor-debtor dynamics
JEL Codes: F34; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debtor's motivation to repay debt (G51) | Improved credit standing in international capital markets (F34) |
| Creditor's ability to forgive debt (F34) | Bargaining outcome where creditor extracts all surplus from debtor (D86) |
| Debtor's repayment decisions (G51) | Future access to capital markets (G19) |
| Creditor's forgiveness (G33) | Facilitation of debtor's repayments (G33) |
| Negotiation strategies employed (C78) | Distribution of payoffs (D39) |
| Subgame-perfect equilibria (C73) | Scenarios where creditor receives all surplus (G33) |
| Debtor's repayment decisions (G51) | Negotiation strategies employed (C78) |