NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Pablo D'Erasmo

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Working Papers

September 2013Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default
with Enrique G. Mendoza: w19477
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.

Forthcoming: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default, Pablo D'Erasmo, Enrique G. Mendoza. in Sovereign Debt and Financial Crisis, Kalemli-Ozcan, Reinhart, and Rogoff. 2014

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