Sovereign debt capacity and the distribution of domestic wealth: a common agency problem

Debora Di Gioacchino, Sergio Ginebri and Laura Sabani

No 105, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: This paper proposes a stylized two-period two-country model illustrating the role played by the distribution of domestic wealth in determining a country’s level of access to international lending. We model sovereign debt redemption policy as the outcome of the interaction between the domestic government and interest groups (locals and foreigners) with conflicting preferences about debt repayment (common agency framework). The main result produced by our model is that, although discriminatory taxation against foreign bond-holders is not available and foreigners are allowed entering the process of buying influence, default is always ex-post observed when all domestic interests are represented and a share of sovereign debt is detained by foreigners. On the contrary, by assuming selective participation to lobbying, we show that a borrowing country’s access to international capital markets increases with inequality in the domestic distribution of wealth.

Keywords: Public debt; Government default; Political economy; Political support; Special interests; Common agency. (search for similar items in EconPapers)
JEL-codes: D82 E58 E62 F33 F34 H63 (search for similar items in EconPapers)
Pages: 30
Date: 2007-12
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