Dhillon, Amrita and Sjöström, Tomas (2009) Leader reputation and default in sovereign debt. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.886).

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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
Official Date:	January 2009
Dates:	Date Event January 2009 Published
Number:	No.886
Number of Pages:	20
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access

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