Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

Pablo D'Erasmo and Enrique Mendoza

Journal of the European Economic Association, 2016, vol. 14, issue 1, 7-44

Abstract: Europe's debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt and nondebtholders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the concentration of debt ownership rises. A government favoring bond holders can also sustain debt, with debt rising as ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or a second asset.

JEL-codes: E44 E6 F34 H63 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (22)

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Related works:
Journal Article: DISTRIBUTIONAL INCENTIVES IN AN EQUILIBRIUM MODEL OF DOMESTIC SOVEREIGN DEFAULT (2016)
Working Paper: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default (2016)
Working Paper: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default (2015)
Chapter: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default (2013)
Working Paper: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:14:y:2016:i:1:p:7-44.

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