Holding out for a better deal: Brinkmanship in the Greek bailout negotiations

Greece and its creditors concluded negotiations over a third bailout by signing a Memorandum of Understanding on 19 August 2015. The dominant view among most economic policy analysts and commentators seems to be that the actions of the Greek government in the months before the deal had been erratic and lacked coordination. In this paper we argue instead that the decisions of the Greek leaders, including asking the voters to reject the earlier terms demanded by the creditors in a referendum, can be rationally explained by the logic of brinkmanship. We develop a game-theoretic model to show that the actions of the Greek government are consistent with a strategy aimed at getting a better bailout deal. •Innovative combination of game-theoretic analysis with reporting on recent events.•First paper to develop a game-theoretic model of brinkmanship in the Greek bailout.•Analysis and explanation of the Greek brinkmanship strategy.•Interesting, counterintuitive results that contradict the dominant view of observers.