Country Solidarity in Sovereign Crises
American Economic Review
vol. 105,
no. 8, August 2015
(pp. 2333-63)
Abstract
When will solidarity, which emerges spontaneously from the fear of spillovers, be reinforced through contracting? The optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing, a borrowing cap, but no joint liability. While joint liability augments total surplus, the borrowing country cannot compensate the deep-pocket guarantor. By contrast, the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability, provided that shocks are sufficiently independent, spillovers sufficiently large, liquidity needs moderate, and available sanctions sufficiently tough. (JEL D86, F34, H63)Citation
Tirole, Jean. 2015. "Country Solidarity in Sovereign Crises." American Economic Review, 105 (8): 2333-63. DOI: 10.1257/aer.20121248Additional Materials
JEL Classification
- D86 Economics of Contract: Theory
- F34 International Lending and Debt Problems
- H63 National Debt; Debt Management; Sovereign Debt