Good Samaritans vs. Hardliners: the role of credible signalling in Greek bailout negotiations

Abstract:

In this paper, we model the interactions between Greece and its creditors as a costly signalling game. The main argument is that a costly exchange of information can improve the recipient's incentives to comply with conditionality. If creditors can credibly signal that suspending financial assistance is a viable option, they will be able to extract concessions from the recipient. Conversely, if the feasibility of the outside option is in doubt, threats to withhold financial support will be toothless.

Our contribution is to highlight the role of information exchanges during crisis bargaining. Such signalling mechanisms are central to understanding the outcomes of the Greek debt drama, but are absent from existing accounts.

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