Cooperative game theoretical solutions for debt forgiveness in financial networks

Absztrakt (kivonat)

Debt forgiveness can sometimes benefit creditors by preventing debtor failure, avoiding default costs, and halting the spread of financial crises throughout the financial network. However, failing firms typically owe debts to multiple creditors, making it challenging to reach an agreement on debt forgiveness to save the firm. This challenge is further complicated if one of the lenders is insolvent. If creditors fail to cooperate effectively, they can all suffer losses. In this paper, we approach debt forgiveness as a cooperative game theoretical problem from a network perspective. We use a model that represents firms with liabilities between any pair of them. Each firm aims to maximize its value by forgiving debt to its debtors. We propose a debt forgiveness scheme that maximizes welfare. This scheme benefits all firms in the network and lies in the strong core of the game, meaning no group of firms can achieve better results by cooperating separately. Additionally, we provide economic reasoning to explain why this scheme is the fairest way to maximize value for the network. Therefore, we consider it a benchmark solution to the game of debt forgiveness.