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Crony Capitalism and Sovereign Default

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  • Victor Vaugirard

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    Abstract

    Cronyism provides policymakers with marked incentives to repay sovereign debt. This takes place at the expense of the average citizen who bears both steep costs of debt repudiation and high costs of debt service, as clientelism increases both financial fragility and the debt burden. The paper sets up a model of strategic debt default that nails down this point, with political distortions and where a representative agent can dismiss the government and overrule its decision. Economic hard times provide an opportunity to implement reforms fighting clientelism, as the implicit coalition between groups of cronies may break down. A model is built along these lines, which highlights cross-country contagion of debt repudiation. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11079-005-5333-0
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    Bibliographic Info

    Article provided by Springer in its journal Open Economies Review.

    Volume (Year): 16 (2005)
    Issue (Month): 1 (January)
    Pages: 77-99

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    Handle: RePEc:kap:openec:v:16:y:2005:i:1:p:77-99

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    Web page: http://www.springerlink.com/link.asp?id=100323

    Related research

    Keywords: crony capitalism; political distortion; debt service; financial fragility; pure contagion;

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    1. Drazen, A. & Grilli, V., 1991. "The Benefits of Crisis for Economic Reforms," Papers 27-91, Tel Aviv.
    2. Guido Tabellini, 1989. "The Politics of Intergenerational Redistribution," NBER Working Papers 3058, National Bureau of Economic Research, Inc.
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    4. Di Gioacchino, Debora & Ginebri, Sergio & Sabani, Laura, 2000. " Bribery and Public Debt Repudiation," Public Choice, Springer, vol. 105(3-4), pages 303-21, December.
    5. Michael Kremer & Seema Jayachandran, 2002. "Odious Debt," NBER Working Papers 8953, National Bureau of Economic Research, Inc.
    6. Frank Gunter, 1991. "Thomas Jefferson on the repudiation of public debt," Constitutional Political Economy, Springer, vol. 2(3), pages 283-301, September.
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    8. Chang, Roberto, 2007. "Financial crises and political crises," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2409-2420, November.
    9. Giannetti, Mariassunta, 2003. " Bank-Firm Relationships and Contagious Banking Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 239-61, April.
    10. Robinson, James A & Verdier, Thierry, 2002. "The Political Economy of Clientelism," CEPR Discussion Papers 3205, C.E.P.R. Discussion Papers.
    11. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
    12. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, 04.
    13. Kumar, Manmohan S & Persaud, Avinash, 2002. "Pure Contagion and Investors' Shifting Risk Appetite: Analytical Issues and Empirical Evidence," International Finance, Wiley Blackwell, vol. 5(3), pages 401-36, Winter.
    14. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
    15. Joseph H. Haslag & Rowena Pecchenino, 2005. "Crony Capitalism and Financial System Stability," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 24-38, January.
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