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Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

Pablo D'Erasmo () and Enrique Mendoza ()

No 16-23, Working Papers from Federal Reserve Bank of Philadelphia

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 non-debtholders. 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 bondholders 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.

Keywords: Public debt; Sovereign default; European debt crisis (search for similar items in EconPapers)
JEL-codes: E44 E6 F34 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2016-08-09
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Related works:
Journal Article: DISTRIBUTIONAL INCENTIVES IN AN EQUILIBRIUM MODEL OF DOMESTIC SOVEREIGN DEFAULT (2016) Downloads
Journal Article: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default (2016) Downloads
Working Paper: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default (2015) Downloads
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) Downloads
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