NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

Pablo D'Erasmo, Enrique G. Mendoza

NBER Working Paper No. 19477
Issued in September 2013
NBER Program(s):   IFM   ME   PE

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.

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This paper was revised on July 15, 2015

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19477

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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