Negotiating economic stabilization measures: The two-level debt game

Beginning with Robert Putnam's two-level game, the two-level debt game is constructed for the negotiations between the IMF, the government and domestic groups. Separate games are constructed for the level I and level II negotiations. The level I negotiation has the structure of Spite, where the government proposes high austerity and the IMF approves the measures. In Spite, a player can have incentives do deviate from its dominant strategy. The level II negotiation has the structure of a Prisoner's dilemma, where the government proposes high austerity and domestic groups modify the measures.; The level I and level II games are integrated into one game, with an additional move by the IMF, where it decides whether to continue or stop disbursements. The two-level debt game predicts that in the absence of incentives to deviate from the dominant strategy, the game will lead to an outcome where disbursements by the IMF are stopped. However, if there are incentives to deviate from the dominant strategy, the IMF continues disbursements.; The two-level debt game is illustrated with the Argentinean debt negotiations of 1996 and the Mexican debt negotiation of 1995.