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Sovereign Debt Capacity and the Distribution of Domestic Wealth: A Common Agency Model

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Author Info
Debora Di Gioacchino
Sergio Ginebri
Laura Sabani

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Abstract

This paper proposes a stylized two-period, two-country model illustrating the role of distribution of domestic wealth in determining a country's level of access to international lending. We model sovereign debt redemption policy in a common agency framework. Within this framework, policy is the outcome of the interaction between government and local and foreign interest groups with conflicting preferences on debt repayment. Our main result is that in full lobby competition, when all interests are represented, the only equilibrium solution is repudiation and the consequent inability of government to access international capital markets. Conversely, when the ability to lobby depends on wealth, governments can access international credit up to a given maximum external debt capacity, determined by the skew in the distribution of domestic wealth. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2008.00776.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of International Economics.

Volume (Year): 16 (2008)
Issue (Month): 4 (09)
Pages: 798-813
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Handle: RePEc:bla:reviec:v:16:y:2008:i:4:p:798-813

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This page was last updated on 2009-11-22.

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