Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

Pablo D'Erasmo and Enrique Mendoza

No 19477, NBER Working Papers from National Bureau of Economic Research, Inc

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-debt holders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as 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: 2013-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Note: IFM ME PE
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Citations: View citations in EconPapers (12)

Published as Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default , Pablo D'Erasmo, Enrique G. Mendoza. in Sovereign Debt and Financial Crises , Kalemli-Özcan, Reinhart, and Rogoff. 2016
Published as Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Distributional Incentives In An Equilibrium Model Of Domestic Sovereign Default," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 7-44, 02.

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Related works:
Journal Article: DISTRIBUTIONAL INCENTIVES IN AN EQUILIBRIUM MODEL OF DOMESTIC SOVEREIGN DEFAULT (2016)
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)
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