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The Uncertainty of Fairness: a Game Theory Analysis for a Debt Mutualization Scheme in the Euro Area

D'Andrea, Sara and Vassalli, Federica (2022): The Uncertainty of Fairness: a Game Theory Analysis for a Debt Mutualization Scheme in the Euro Area.

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Abstract

This paper aims to briefly present the fairness approach in game theory and its potential application. Fairness means that players consider not only personal payoffs but also others’ payoffs and beliefs regarding their actions. In this context, we distinguish two approaches, one based on the material payoff and the other on beliefs. We adopt the fairness approach in proposing three games for studying the strategic interaction between a hypothetical country and the European Union in proposing a debt mutualization scheme. We find that the optimal debt quota to share with the European Union is 50%; concerning the moral hazard problem, commitment to structural reforms for countries with high public debt leads to the best equilibrium, that can be preserved following an incentive strategy.

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