@article{747b44a6a3b84f87a931c7a6c4f7e22b,

title = "Strategic models of sovereign-debt renegotiations",

abstract = "The sovereign-debt literature has often implicitly assumed that all the power in the bargaining game between debtor and creditor lies with the latter. This paper explores that assumption by analyzing three game-theoretic models of debt renegotiations. In two of the models, both of which are built on the traditional one-sector growth model, all the subgame-perfect equilibria have an extreme form in which the game's surplus is captured by the creditor. The third game has many subgame-perfect equilibria that do not have this feature, however. The roles of various assumptions in all three games are examined.",

author = "Raquel Fernandez",

note = "Funding Information: Proof of Proposition 3.3. Suppose (ii, 6) is a subgame-perfect strategy combination for G3( e, Do) with Do> e, in the play of which A makes one forgiveness in period 0, B repays optimally thereafter (under the assumption that there will be no further acts of forgiveness forthcoming), and B obtains her maximin payoff. LetrepaymentendinperiodT NotethatT?;1sinceu(z)+f3Z>u(e)(I-13)-1.Considerthelasttwopayments in this sequence, T -1 and T. Since under (a, 6) B repays Do - fo (with interest) without expecting any further actsofforgiveness,bmusthavePT=eandPT-I=DT-1- e(l+r)~e(fromconcavityofuandz?;e). LetB deviatebyreducingPT-IbyE(l+-r',where0<E<e[l-a(l+r)](1+-r'.sothatnow DT=e+E. Ifatthe next A-move, a makes an act of forgiveness fT smaller than E, A's payoff against 6 cannot exceed the discounted value of what B would repay if B assumed no further acts of forgiveness were forthcoming (since, by the Corollary, the play of (a, 6) must have repayment end with a payment of e), i.e, B will make payments of at most PT = (I + r)-t re + E(1 + r) - fT < (1- a)e and PT+ 1 = e. Hence A's payoff (discounted to T) from [r < E against 6 is strictly smaller than e. By forgiving E, on the other hand, A's payoff against 6 is e, since, by the Corollary, B repays e immediately. Consequently, the reduction of PT-I by E is a profitable deviation for B, and hence (a, 6) is not subgame perfect. II ProofofProposition3.4. IfAmakesaninitialactofforgivenessofsizefosuchthatDo-fo>e,thenA's payoff cannot exceed (Do - fo - e( 1+ r)-1) + ae < e, since by the Corollary at every subgame-perfect equilibrium the last payment made by B must be e whenever a B-subgame commences with D - f> e. By forgiving fo such that Do-fo = e, on the other hand, A's payoff in every subgame-perfect equilibrium of the continuation game is e, again by the corollary. Hence A must forgive the debt down to e in every subgame-perfect equilibrium (when the initial condition is as given above), and B's payoff is thus greater than her maximin payoff. II Acknowledgements. This paper is mainly a synthesis of our two working papers listed in the references. We wish to thank John Moore, Ken Rogoff, Ariel Rubinstein, members of the audiences at several seminars, and the referees for helpful comments. Financial support was provided by National Science Foundation Grants SES86-03550, SES88-08362 and SES89-08390.",

year = "1990",

month = jul,

doi = "10.2307/2298017",

language = "English (US)",

volume = "57",

pages = "331--349",

journal = "Review of Economic Studies",

issn = "0034-6527",

publisher = "Oxford University Press",

number = "3",

}