Sovereign debt: election concerns and the democratic disadvantage

Amrita Dhillon (), Andrew Pickering and Tomas Sjostrom

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

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 3 investmentgrades. With farsighted institutions there is, if anything, a democratic advantage.

Keywords: Sovereign debt; Default; Risk premia; Autocracy; Democracy; Institutions JEL Classification: H63; F55; D72; D82; H75; O43; C72. (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-pol
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Citations: View citations in EconPapers (3)

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https://warwick.ac.uk/fac/soc/economics/research/c ... 422-2019_dhillon.pdf

Related works:
Journal Article: 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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Persistent link: https://EconPapers.repec.org/RePEc:cge:wacage:422

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