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

16 Pages Posted: 20 Aug 2015

See all articles by Kaushik Basu

Kaushik Basu

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

Joseph E. Stiglitz

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

Date Written: August 2015

Abstract

As the euro area crisis drags on, it is evident that a part of the problem lies in the architecture of debt within the euro area. This study argues that at least part of the debt problem could be addressed through limited cooperative action entailing appropriately structured contracts generating cross‐country liability for sovereign debt incurred by individual nations within the European Union. Such agreements are currently proscribed by the Treaty of Lisbon. We construct a game‐theoretic model demonstrating that there exist self‐fulfilling equilibria, which are Pareto superior to the existing outcome and which would come into existence if cross‐country debt liabilities were permitted.

Suggested Citation

Basu, Kaushik and Stiglitz, Joseph E., Sovereign Debt and Joint Liability: An Economic Theory Model for Amending the Treaty of Lisbon (August 2015). Feature Issue, Vol. 125, Issue 586, pp. F115-F130, 2015. Available at SSRN: https://ssrn.com/abstract=2647126 or http://dx.doi.org/10.1111/ecoj.12300

Kaushik Basu (Contact Author)

Cornell University - Department of Economics ( email )

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Joseph E. Stiglitz

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