Sovereign debt and incentives to default with uninsurable risks
Gaetano Bloise (),
Herakles Polemarchakis () and
Yiannis Vailakis ()
Additional contact information
Gaetano Bloise: Department of Economics, Yeshiva University
Herakles Polemarchakis: Department of Economics, University of Warwick
Yiannis Vailakis: Adam Smith Business School, University of Glasgow
Theoretical Economics, 2017, vol. 12, issue 3
We show that sovereign debt is unsustainable if debt contracts are not supported by direct sanctions and default carries only a ban from ever borrowing in financial markets even in the presence of uninsurable risks and time-varying interest rate. This extension of Bulow and Rogoff (1989) requires that the present value of the endowment be finite under the most optimistic valuation. We provide examples where this condition fails and sovereign debt is sustained by the threat of loss of insurance opportunities upon default, despite the fact that the most pessimistic valuation of the endowment, the natural debt limit, is finite.
Keywords: Sovereign risk; Ponzi games; reputational debt; incomplete markets (search for similar items in EconPapers)
JEL-codes: F34 H63 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:2146
Access Statistics for this article
Theoretical Economics is currently edited by Simon Board, Federico Echenique, Thomas Mariotti, Florian Scheuer, Ran Spiegler
More articles in Theoretical Economics from Econometric Society
Bibliographic data for series maintained by Martin J. Osborne ().