Sovereign debt: election concerns and the democratic disadvantage

Amrita Dhillon (), Andrew Pickering and Tomas Sjostrom

Oxford Economic Papers, 2019, vol. 71, issue 2, 320-343

Abstract: We re-examine the concept of ‘democratic advantage’ in sovereign debt ratings when optimal repayment policies are time-inconsistent. If democratically elected politicians are unable to make credible commitments, then default rates are inefficiently high, so democracy potentially confers a credit market disadvantage. Institutions that are shielded from political pressure may ameliorate the disadvantage by adopting a more farsighted perspective. Using a numerical measure of institutional farsightedness obtained from the Global Insight Business Risk and Conditions database, we find that the observed relationship between credit ratings and democratic status is strongly conditional on farsightedness. With myopic institutions, democracy is associated with worsened credit ratings on average by about three investment grades. With farsighted institutions there is, if anything, a democratic advantage.

JEL-codes: C72 D72 D82 F55 H63 H75 O43 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Sovereign debt: election concerns and the democratic disadvantage (2019)
Working Paper: Sovereign Debt: Election Concerns and the Democratic Disadvantage (2016)
Working Paper: Sovereign Debt - Election Concerns and the Democratic Disadvantage (2016)
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