Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

Pablo D'Erasmo and Enrique Mendoza

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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 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.

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)
Pages: 67 pages
Date: 2015-08-27, Revised 2015-08-27
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://economics.sas.upenn.edu/sites/default/files/filevault/15-031.pdf (application/pdf)

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)
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)
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