The scope for collusive behavior among debtor countries
We study the question of whether there exist strategies whereby countries are able to sustain a cartel or collusive behavior when bargaining with a bank over the amount of debt to be repaid. We show that despite the existence of economies to scale in bargaining--if commitment were possible the countries would benefit from joint bargaining--a debtors' cartel will not emerge in equilibrium (in the absence of credible commitment mechanisms). A unique subgame-perfect equilibrium exists in which the bank is effectively able to isolate each country and extract from each the same payoff that it would obtain in the absence of economies to scale. Consequently, a country would be better off if another country declared default. We also show that if two countries of unequal size are bargaining with a bank, in equilibrium a decrease in the size of the smaller country implies a greater payoff to the large country although the payoff to the small country is invariant.
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- Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
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- Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
- Jeffrey Sachs, 1983. "Theoretical Issues in International Borrowing," NBER Working Papers 1189, National Bureau of Economic Research, Inc.
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- Raquel Fernandez & David Kaaret, 1988. "Bank Size, Reputation, and Debt Renegotiation," NBER Working Papers 2704, National Bureau of Economic Research, Inc.
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