Debt stabilization with a deadline

This paper presents an extension of the Alesina and Drazen (1991. American Economic Review 81, 1170-1188) war of attrition model, extended by includin g an exogenous deadline, beyond which a punishment, namely a penalty is exa cted from all players in case of no agreement. I solve for this game and es tablish that the higher the penalty is, the higher the probability of stabi lizing the debt on time will be. I also show that there is a period of comp lete inertia right before the deadline: no group of agents wants to concede just before this date. The length of this period of total inertia is incre asing in the penalty. (C) 2000 Elsevier Science B.V. All rights reserved.