The Scope for Collusive Behavior Among Debtor Countries

32 Pages Posted: 8 Jan 2008 Last revised: 22 Feb 2021

See all articles by Raquel Fernández

Raquel Fernández

New York University - Leonard N. Stern School of Business, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Jacob Glazer

Boston University

Date Written: May 1989

Abstract

We study the question of whether there exist strategies whereby countries are able to sustain a cartel or collusive behavior when bargaining with a bank over the amount of debt to be repaid. We show that despite the existence of economies to scale in bargaining--if commitment were possible the countries would benefit from joint bargaining--a debtors' cartel will not emerge in equilibrium (in the absence of credible commitment mechanisms). A unique subgame-perfect equilibrium exists in which the bank is effectively able to isolate each country and extract from each the same payoff that it would obtain in the absence of economies to scale. Consequently, a country would be better off if another country declared default. We also show that if two countries of unequal size are bargaining with a bank, in equilibrium a decrease in the size of the smaller country implies a greater payoff to the large country although the payoff to the small country is invariant.

Suggested Citation

Fernández, Raquel and Glazer, Jacob, The Scope for Collusive Behavior Among Debtor Countries (May 1989). NBER Working Paper No. w2980, Available at SSRN: https://ssrn.com/abstract=463440

Raquel Fernández (Contact Author)

New York University - Leonard N. Stern School of Business, Department of Economics ( email )

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Jacob Glazer

Boston University

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