This document provides a summary of the paper "Sovereign Debt and Structural Reforms" by Müller, Storesletten, and Zilibotti. It discusses the model's choices, the constrained optimal allocation, effort under different scenarios, and potential for future research. Key points include that effort affects the probability of moving to a better economic state, the cost of default is independent of debt levels or the economy, and states are modeled as a pair of economic productivity and reform level, giving the model structure and flexibility.

1. Sovereign Debt and Structural Reforms
M¨uller, Storesletten & Zilibotti
Very neat paper.
Lots in it (78 pages, small font - single spaced).
Lots of potential for future research.
1/5

2. Modelling Choices
Effort affects probability of moving to a better state.
Cost of default is independent of debt or state of the economy.
2/5

3. Constrained Optimal Allocation
One-sided commitments: Planner (IMF) can commit, country
can’t. Implies differentiability (two-sided limited commitment
can lead to non-differentiability).
Side that can’t commit takes the action (country). Implies
concavity (other way around may introduce non-concavities
when the default payoff depends on action)
States are pair of (w, φ). φ enters linearly into one constraint.
Gives much structure and tractability and flexibility for the
calibration.
3/5

4. Effort
First-best
X (p)
m.c.
=
β
1 − β(1 − p)
discounting


( ¯w − w)u (c)
value of increase
+ X(p)
cost saving



Unobservable effort
X (p)
m.c.
= β ¯ωφ − ωφ
m.b. to country
4/5

5. Effort
Conditionality
X (p)
m.c.
= β ¯ωφ − ωφ
m.b. to country
+R−1
−
1
P (ωφ)
¯P(¯ωφ − P(ωφ
m.b. to planner
Deviation
X (p)
m.c.
= β ¯W − W
m.b. to country
5/5