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Why Are There Serial Defaulters? Evidence from Constitutions

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Emanuel Kohlscheen

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Abstract

Presidential democracies were 4.9 times more likely than parliamentary democracies to default on external debts between 1976 and 2000. In this article I argue that the explanation for the serial defaults by a number of sovereign borrowers lies in their constitutions. Ceteris paribus, parliamentary democracies are less likely than presidential democracies to default on their liabilities because the confidence requirement creates a credible link between economic policies and the executive's political survival. This link tends to strengthen the repayment commitment when politicians are opportunistic. I show that this effect is large in the contemporary world even when the comparison is restricted to countries that are similar in terms of colonial origin, geography, and economic variables. Since a country's form of government is typically chosen at the time of independence and is highly persistent over time, constitutions can explain why debt policies in developing countries are related to individual histories.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?id=doi:10.1086/519814
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Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 50 (2007)
Issue (Month): ()
Pages: 713-730
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Handle: RePEc:ucp:jlawec:v:50:y:2007:p:713-730

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich to Poor Capital Flows," NBER Working Papers 10296, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, 09. [Downloadable!]
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  4. North, Douglass C, 1991. "Institutions," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 97-112, Winter. [Downloadable!] (restricted)
  5. Persson, Torsten & Tabellini, Guido, 2002. "Do constitutions cause large governments? Quasi-experimental evidence," European Economic Review, Elsevier, vol. 46(4-5), pages 908-918, May. [Downloadable!] (restricted)
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  1. Raffaela Giordano & Pietro Tommasino, 2009. "What determines debt intolerance? The role of political and monetary institutions," Temi di discussione (Economic working papers) 700, Bank of Italy, Economic Research Department. [Downloadable!]
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This page was last updated on 2009-11-16.

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