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Publisher: University of Warwick, Department of Economics
Languages: English
Types: Book
Subjects: HJ, JF
This paper compares default incentives in competitive sovereign debt markets when leaders can be either democratically elected or dictators. When leaders can be replaced as in democracies, the incentives for repayment are mainly the ego rents from office and the possibility of getting a corrupt leader from replacement. In a dictatorship, on the other hand, the cost of not repaying loans is the permanent loss of reputation and the loss of future access to credit. There is a trade off between repayment and risk sharing. We show, counter-intuitively, that when ego rents are low, and value of reputation to dictators is high, then democracies repay more often and have lower risk premia than dictatorships.
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    • 2. Aghion and Bolton (1991) ”Government Debt and the risk of default: a politico-economic model of the strategic role of debt”, chapter in ”Capital Markets and Debt Management”, eds. R Dornbusch and M.Draghi, MIT Press.
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    • 12. McGillivray and Smith (2003)”Who can be trusted? Sovereign Debt and the impact of leadership change”, Mimeo, NYU Department of Political Science.
    • 13. S.Saiegh (2004)”Income Distribution, Political Competition and Sovereign Debt Repudiation” Mimeo Dept of Political Science, University of Pittsburgh.
    • 14. S.Saiegh (2005) ”Can Democracy prevent default?”, Mimeo Dept of Political Science, University of Pittsburgh.
    • 15. Shleifer, A (2003), ”Will the Sovereign Debt market survive?”, American Economic Review, Vol.93, N0.2, Papers and Proceedings,pp 85-90.
    • 16. Shultz, K and B. Weingast (2003), ”The democratic Advantage”, International Organization 57.
    • 17. Tomz, M. and M. Wright, 2007, ”Do countries default in bad times?” Mimeo, FRB of San Francisco Working Paper No.2007-17.
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