Delay and Haircuts in Sovereign Debt - University of St Andrews

type and a stochastic bargaining surplus, there exists a Perfect Bayesian equilibrium
with two-period delay.
2.2 Comparisons of payo¤s with one-period and two-period
delay
In what follows, we compare the creditor’s payo¤ in the case with oneperiod
delay and in the case with two-period delay in the mixed strategy
equilibrium. This would allow us to establish the correlation between delay
and size of haircuts in sovereign debts. Table 6 provides a summary for the
creditor’s continuation payo¤s from rejecting the debtor’s o¤er at t = 1 in
the case with one-period and two-period delay.
Debtor’s type
Creditor’s payo¤s
with one-period delay
E
Creditor’s payo¤s
with two-period delay
Optimistic debtor
2
^a
(E s)
Cautious debtor
2
^a
Table 6: Delay and haircuts in sovereign debt restructuring (in a mixed
strategy)
Basing on Table 6, for the creditor’s expected payo¤ with one-period delay
to be greater than the expected payo¤ with two-period delay, it requires
that
E
(E
q 0 + (1 q 0 )
2
2
s)
> ^a:
Let Ex 0 2 = E (E s)
2
+ ", where " is a strictly positive number. By
computation, the above condition reduces to
E
(E
q 0 + (1 q 0 )
2
2
s) (E s)
2
E
+ (1 q 0 )
s
s
> 0;
which is equivalent to
q 0
s
2
E
+ (1 q 0 )
s
s
> 0;
a condition which always holds.
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