Levy, Amnon, Sovereign debt and the triple R problem repudiation, retaliation and reputation, Department of Economics, University of Wollongong, Working Paper 95-5, 1995, 20.
The interaction between a creditor and a sovereign debtor is described as a ‘one-shot’ game with discrete actions—total or no debt-repudiation and seizure of asset holding abroad. Possible Nash equilibria where each player chooses an action as to maximise his expected payoff given his beliefs about the other player’s action and the implications of those actions on the players’ trustworthy reputation are identified. However, if reputation losses vary convexly with the players’ relative hostility, partial repudiation and seizure might be the preferred strategies. The preferred repudiation and seizure rates are analysed under asymmetric and symmetric information about the state of the world.