Dhillon, Amrita and Sjöström, Tomas (2009) Leader reputation and default in sovereign debt. Working Paper. University of Warwick, Department of Economics, Coventry.

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Abstract

This paper compares default incentives in competitive sovereign debt markets when leaders can be either democratically elected or dictators. When leaders can be replaced as in democracies, the incentives for repayment are mainly the ego rents from office and the possibility of getting a corrupt leader from replacement. In a dictatorship, on the other hand, the cost of not repaying loans is the permanent loss of reputation and the loss of future access to credit. There is a trade off between repayment and risk sharing. We show, counter-intuitively, that when ego rents are low, and value of reputation to dictators is high, then democracies repay more often and have lower risk premia than dictatorships.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HJ Public Finance J Political Science > JF Political institutions (General)
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Dictatorship, Democracy, Debts, Public, Economic policy
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	January 2009
Number:	No.886
Number of Pages:	20
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	1. Amador, M., 2003 ”A Political Economy Model of Sovereign Debt Repayment”, mimeo Department of Economics, Stanford University. 2. Aghion and Bolton (1991) ”Government Debt and the risk of default: a politico-economic model of the strategic role of debt”, chapter in ”Capital Markets and Debt Management”, eds. R Dornbusch and M.Draghi, MIT Press. 3. Besley, T and S.Coate (1997), ”An economic model of representative democracy”, Quarterly Journal of Economics, Vol. 112, February, pp 85-114. 4. Bordo,M. and K.Oosterlinck, ”Do Political Changes trigger debt default and do defaults lead to political changes?”, mimeo Rutgers University and NBER. 5. Bulow, J and K.Rogoff, 1989, ”Sovereign Debt: Is to forgive to forget?” American Economic Review. 79. 6. Brewer,T L. and P.Rivoli,1990, ”Politics and Perceived Country Creditworthiness in International Banking”, Journal of Money, Credit and Banking, Vol 22(2). 7. Cole, H and P.Kehoe, 1997, ” Reviving ReputationalModels of Sovereign Debt”, Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 21 No.1. 8. Dixit and Londregan (2000) ”Credibility of Govt Debt” Journal of Economic Theory Vol. 94(1), pp80–105. 9. Eaton, J and R Fernandez,1995, ”Sovereign Debt” Handbook of International Economics. 10. Eaton, J and M Gersovitz, 1981, ”Debt with Potential Repudiation”, Review of Economic Studies, 48. 11. Kletzer, K and B.Wright, 2000, ”Sovereign Debt as Intertemporal Barter”, American Economic Review Vol. 90, No 3. 12. McGillivray and Smith (2003)”Who can be trusted? Sovereign Debt and the impact of leadership change”, Mimeo, NYU Department of Political Science. 13. S.Saiegh (2004)”Income Distribution, Political Competition and Sovereign Debt Repudiation” Mimeo Dept of Political Science, University of Pittsburgh. 14. S.Saiegh (2005) ”Can Democracy prevent default?”, Mimeo Dept of Political Science, University of Pittsburgh. 15. Shleifer, A (2003), ”Will the Sovereign Debt market survive?”, American Economic Review, Vol.93, N0.2, Papers and Proceedings,pp 85-90. 16. Shultz, K and B. Weingast (2003), ”The democratic Advantage”, International Organization 57. 17. Tomz, M. and M. Wright, 2007, ”Do countries default in bad times?” Mimeo, FRB of San Francisco Working Paper No.2007-17.
URI:	http://wrap.warwick.ac.uk/id/eprint/1331

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