Country Solidarity in Sovereign Crises

Jean Tirole

American Economic Review, 2015, vol. 105, issue 8, 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)

JEL-codes: D86 F34 H63 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.20121248
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Citations: View citations in EconPapers (46)

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