An Arrears Crisis and Stabilization Failure in a Transition Economy

The paper addresses the problem of the arrears crises in transition economies using a war-of-attrition type dynamic game of incomplete information. Analysis of the sequential equilibrium of the game reveals how a representative firm's perception of the government's ability to enforce adjustment to the announced stabilization program affects the firm's decision whether to adjust or to postpone adjustment and fall into arrears. An extension of the basic model is used to explore the opportunity for the government to signal its commitment to a tight monetary policy by applying for an IMF loan.J. Comp. Econom., December 2000, 28(4), pp. 665–699. University of Alberta, Edmonton, Alberta T6G 2H4, Canada.