Sovereign Debt - Election Concerns and the Democratic Disadvantage

Amrita Dhillon (), Andrew Pickering and Tomas Sjostrom

Discussion Papers from Department of Economics, University of York

Abstract: We examine default decisions under different political systems. If democratically elected politicians are unable to make credible commitments to repay externally held debt, default rates are inefficiently high because politicians internalize voter utility loss from repayment. Politicians who are motivated by electoral concerns are more likely to default in order to avoid voter utility losses, and, since lenders recognize this, interest rates and risk premiarise. Therefore, democracy potentially confers a credit market disadvantage. However, farsighted institutions that take into account how interest rates respond to default risk can ameliorate the disadvantage. Using a numerical measure of institutional farsightedness obtained from the Government Insight Business Risk and Conditions database, we …find that the observed relationship between credit-ratings and democratic status is indeed strongly conditional on farsightedness. With myopic institutions, democracy is estimated to cost on average about 2.5 investment grades. With farsighte institutions there is, if anything, a democratic advantage.

Keywords: Sovereign debt; Default; Risk premia; Autocracy; Democracy; Institutions (search for similar items in EconPapers)
JEL-codes: C72 D72 D82 F55 H63 H75 O43 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-cdm, nep-pol, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Sovereign debt: election concerns and the democratic disadvantage (2019)
Working Paper: Sovereign debt: election concerns and the democratic disadvantage (2019)
Working Paper: Sovereign Debt: Election Concerns and the Democratic Disadvantage (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:16/13

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