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International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon

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  • Basu , Kaushik
  • Stiglitz, Joseph E.

Abstract

As the Eurozone crisis drags on, it is evident that a part of the problem lies in the architecture of debt and its liabilities within the Eurozone and, more generally, the European Union. This paper argues that a large part of the problem can be mitigated by permitting appropriately-structured cross-country liability for sovereign debt incurred by individual nations within the European Union. In brief, the paper makes a case for amending the Treaty of Lisbon. The case is established by constructing a game-theoretic model and demonstrating that there exist self-fulfilling equilibria, which would come into existence if cross-country debt liability were permitted and which are Pareto superior to the existing outcome.

Suggested Citation

  • Basu , Kaushik & Stiglitz, Joseph E., 2013. "International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon," Policy Research Working Paper Series 6555, The World Bank.
    • Handle: RePEc:wbk:wbrwps:6555
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    References listed on IDEAS

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    1. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 162-194, June.
    2. Patrick Rey & Joseph E. Stiglitz, 1993. "Short-Term Contracts as a Monitoring Device," NBER Working Papers 4514, National Bureau of Economic Research, Inc.
    3. Basu, Kaushik & Morita, Hodaka, 2006. "International credit and welfare: A paradoxical theorem and its policy implications," European Economic Review, Elsevier, vol. 50(6), pages 1507-1528, August.
    4. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    5. Hatlebakk, Magnus, 2002. "A new and robust subgame perfect equilibrium in a model of triadic power relations," Journal of Development Economics, Elsevier, vol. 68(1), pages 225-232, June.
    6. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-190, March.
    7. Basu, Kaushik, 2003. "Prelude to Political Economy: A Study of the Social and Political Foundations of Economics," OUP Catalogue, Oxford University Press, number 9780199261857.
    8. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    9. Espen Villanger, 2003. "Company interests and foreign aid policy: Playing donors out against each other," CMI Working Papers WP 2003:5, CMI (Chr. Michelsen Institute), Bergen, Norway.
    10. Joseph Stiglitz & Jungyoll Yun, 2013. "Optimal Provision of Loans and Insurance Against Unemployment From A Lifetime Perspective," NBER Working Papers 19064, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Foley-Fisher, Nathan & McLaughlin, Eoin, 2016. "Sovereign debt guarantees and default: Lessons from the UK and Ireland, 1920–1938," European Economic Review, Elsevier, vol. 87(C), pages 272-286.

    More about this item

    Keywords

    Debt Markets; Access to Finance; Banks&Banking Reform; Bankruptcy and Resolution of Financial Distress; Economic Theory&Research;

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