Unique equilibrium in the Eaton–Gersovitz model of sovereign debt

Adrien Auclert*, Matthew Rognlie

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

A common view of sovereign debt markets is that they are prone to multiple equilibria. We prove that, to the contrary, Markov perfect equilibrium is unique in the widely studied model of Eaton and Gersovitz (1981), and we discuss multiple extensions and limitations of this finding. Our results show that no improvement in a borrower׳s reputation for repayment can be self-sustaining, thereby strengthening the Bulow and Rogoff (1989) argument that debt cannot be sustained by reputation alone.

Original languageEnglish (US)
Pages (from-to)134-146
Number of pages13
JournalJournal of Monetary Economics
Volume84
DOIs
StatePublished - Dec 1 2016

Keywords

  • Default
  • Multiple equilibria
  • Sovereign debt

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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