International Lending, Sovereign Debt and Joint Liability: An Economic Theory Model for Amending the Treaty of Lisbon

31 Pages Posted: 20 Apr 2016

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Kaushik Basu

Cornell University - Department of Economics; Harvard University - Harvard Institute of Economic Research; IZA Institute of Labor Economics; World Bank

Date Written: August 1, 2013

Abstract

As the Eurozone crisis drags on, it is evident that a part of the problem lies in the architecture of debt and its liabilities within the Eurozone and, more generally, the European Union. This paper argues that a large part of the problem can be mitigated by permitting appropriately-structured cross-country liability for sovereign debt incurred by individual nations within the European Union. In brief, the paper makes a case for amending the Treaty of Lisbon. The case is established by constructing a game-theoretic model and demonstrating that there exist self-fulfilling equilibria, which would come into existence if cross-country debt liability were permitted and which are Pareto superior to the existing outcome.

Keywords: Debt Markets, Access to Finance, Banks & Banking Reform, Bankruptcy and Resolution of Financial Distress, Economic Theory & Research

Suggested Citation

Stiglitz, Joseph E. and Basu, Kaushik, International Lending, Sovereign Debt and Joint Liability: An Economic Theory Model for Amending the Treaty of Lisbon (August 1, 2013). World Bank Policy Research Working Paper No. 6555. Available at SSRN: https://ssrn.com/abstract=2306909

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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Kaushik Basu

Cornell University - Department of Economics ( email )

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