Country solidarity in Sovereign crises

Jean Tirole*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

25 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)2333-2363
Number of pages31
JournalAmerican Economic Review
Volume105
Issue number8
DOIs
StatePublished - Aug 1 2015

ASJC Scopus subject areas

  • Economics and Econometrics

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