We examine the possibility for collusive behavior to originate among debtor countries negotiating their debts with the same bank. The bank punishes a country in each period in which the latter fails to repay its renegotiated debt. Punishing a country is costly for the bank. We show that if countries are able to commit to a cartel they can each do better than if they were the sole country negotiating with the bank. In the absence of precommitment mechanisms, however, we show that no collusive behavior is able to arise. Instead, in the unique subgame-perfect equilibrium the bank effectively exploits each country's fear that the other country will betray it and reach an earlier agreement with the bank. In equilibrium the bank extracts from each country the same payment as it would in the absence of the other country or as it would if its cost of punishment function were linear.
ASJC Scopus subject areas
- Economics and Econometrics