Much of the debate surrounding the LDC-debt crisis involves asking and answering the question of who will pay for the costs associated with settling these debts. This question can be best addressed in a context which accounts for the strategic nature of many of the decisions involved. The purpose of this project is to construct and develop game-theoretic models that will help us better understand the debt crisis and the impact of various proposals designed to deal with it. Two areas of research will be addressed: (1) Sovereign-debt renegotiations, and (2) The strategic interactions among debtor countries. The first part will focus on developing models which recognize that a kind of bargaining game exists between a sovereign debtor and a creditor, insofar as the latter cannot commit to punishing (or not rewarding) the former unless the entire debt is repaid. These models will shed light on how LDC governments' policies may affect the bargaining equilibrium and how different proposals impinge upon this equilibrium. The second part of the study will consider how the presence of other debtor countries affects the bargaining problem between debtor and creditor. In particular, the avenues by which a country's bargaining strategy may influence another's will be analyzed as well as the scope for collusive behavior among the debtor countries.
