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Crony Capitalism and Sovereign Default

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Author Info
Victor Vaugirard ()
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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Publisher Info
Article provided by Springer in its journal Open Economies Review.

Volume (Year): 16 (2005)
Issue (Month): 1 (January)
Pages: 77-99
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
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

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

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  1. Seema Jayachandran, 2004. "Odious Debt," UCLA Economics Online Papers 298, UCLA Department of Economics. [Downloadable!]
    Other versions:
  2. Joseph H. Haslag & Rowena Pecchenino, 2005. "Crony Capitalism and Financial System Stability," Economic Inquiry, Oxford University Press, vol. 43(1), pages 24-38, January. [Downloadable!] (restricted)
  3. Robinson, James A & Verdier, Thierry, 2002. "The Political Economy of Clientelism," CEPR Discussion Papers 3205, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Roberto Chang, 2005. "Financial Crises and Political Crises," NBER Working Papers 11779, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September. [Downloadable!] (restricted)
  7. Victor E. Vaugirard, 2004. "Informational Contagion of Sudden Stops in a Global Games Framework," Open Economies Review, Springer, vol. 15(2), pages 169-192, 04. [Downloadable!]
  8. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, vol. 83(3), pages 598-607, June. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. 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.
  11. Tabellini, Guido, 1991. "The Politics of Intergenerational Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 335-57, April. [Downloadable!] (restricted)
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  12. Kumar, Manmohan S & Persaud, Avinash, 2002. "Pure Contagion and Investors' Shifting Risk Appetite: Analytical Issues and Empirical Evidence," International Finance, Blackwell Publishing, vol. 5(3), pages 401-36, Winter. [Downloadable!] (restricted)
  13. Di Gioacchino, Debora & Ginebri, Sergio & Sabani, Laura, 2000. " Bribery and Public Debt Repudiation," Public Choice, Springer, vol. 105(3-4), pages 303-21, December. [Downloadable!] (restricted)
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This page was last updated on 2009-11-12.

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