Cueing Transition in Sovereign Debt Contracts: Network Effects, Coordination Games, and Focal Points in the Choice of Mandate Versus Contract

Abstract

In the face of dramatic recent changes in the norms of sovereign debt restructuring - the substitution of collective action clauses for unanimous action requirements in bond contracts - academics and policymakers alike have raised questions about the underlying dynamics of the drafting and adoption of sovereign debt contracts. How, over less than a year, could the market of sovereign debt issues under New York law have completely abandoned the longstanding constraint of unanimous consent to restructuring, and replaced it with the far more forgiving standard of majority action? I attempt a preliminary response, grounded in the microeconomics of network effects and an analysis of games, an inadequately explored corner of game theory. Neither network effects nor coordination games has been treated in the sovereign debt literature to date, but collectively, they favor what I term a theory of the recent transition in sovereign debt contracts. A cueing perspective, in turn, has important implications for the further development of sovereign debt practice and convention, and suggests that the conventional dichotomy of mandate versus contract in the efficient transformation of such practice and convention may overlook public entities' true role in such development.