Debt Fragility and Bailouts

22 Pages Posted: 15 Sep 2012

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2012


This paper studies debt fragility and the sharing of the resulting strategic uncertainty through ex post bailouts. Default arises in equilibrium because of both fundamental shocks and beliefs. The probability of default depends on borrowing rates and, in equilibrium, on the beliefs of lenders about this probability. This interaction creates a strategic complementarity and thus the basis for strategic uncertainty. The paper analyzes the role of credible ex post bailouts as a means of sharing both fundamental and strategic uncertainty. While bailouts may occur in some states, debt fragility remains.

Suggested Citation

Cooper, Russell W., Debt Fragility and Bailouts (September 2012). NBER Working Paper No. w18377. Available at SSRN:

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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