Making Game Theory Useful: Predicting Debt Negotiations

Abstract

In Debt Games, Vinod Aggarwal has taken a giant step toward making game theory useful for understanding and even predicting important outcomes in international relations. Aware that game theory often falls short empirically both because it is static (that is, actors cannot change the game from within) and because it infers payoffs retrospectively from outcomes, Aggarwal develops a model that is both predictive and dynamic. His model derives payoffs from a prior set of situational constraints and enables actors to use norms, capabilities, and alliances to alter sequentially the type of game being played. Aggarwal tests this more predictive and dynamic model by studying sixty-one cases of debt rescheduling involving groups of lenders and four principal debtor countries: Mexico and Peru (from the 1820s to the 1950s), and Argentina and Brazil (from the 1970s to the 1990s). He conceives each case of debt negotiations as a bilateral bargaining relationship involving strategic interaction between a single debtor and the group of lenders. Although Aggarwal reviews systemic influences on bilateral bargaining in each historical period (including such neorealist variables as the number of major actors, and such neoliberal variables as the strength of international regimes), he finds that these factors leave much variation to be explained. He seeks answers to more specific questions. For example, how much adjustment will a debtor undertake, and what concessions will the lenders offer? Will creditor governments or international organizations intervene in the negotiations? Depending on initial outcomes, will debtors or lenders try to alter the terms of subsequent negotiations (games)? To answer these questions, Aggarwal constructs his game theoretic model in three parts. First, in the study's most innovative contribution, he derives preferences for both debtors and lenders by examining their goals and the weights they assign to these goals in terms of key aspects of their situations. Debtors seek to (1) secure additional funds, (2) minimize the political and economic costs of adjustment, and (3) minimize penalties by maintaining good relations with lenders. Lenders seek to (1) minimize further resource commitments, (2) encourage debt servicing, and (3) avoid possible penalties imposed by debtors. Debtors and lenders weight these goals differently depending on three situational factors: (1) their overall capabilities, (2) their capabilities within the specific debt-related issue area, and (3) the strength or weakness of their supporting domestic coalitions. Thus debtors with strong domestic coalitions give less weight to adjustment costs than those with weak coalitions; lenders who are financially secure give lower priority to debt servicing; and so on.