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Underinvestment and Capital Misallocation Under Sovereign Risk

Author

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  • Carlos Esquivel

    (Rutgers University)

Abstract

Capital and its sectoral allocation affect default incentives. Under general assumptions, default risk is decreasing in the total stock of capital and increasing in the share of capital allocated to non-tradable production. This implies that when competitive households make all investment decisions capital has two externalities: a capital-stock externality and a portfolio externality. These hamper the ability of a benevolent government to make optimal borrowing and default decisions and are exacerbated during periods of distress. Competitive equilibria feature underinvestment, larger non-traded sectors, more default, and lower debt and consumption than a centralized planner's allocation. Select number of author(s): : 1

Suggested Citation

  • Carlos Esquivel, 2024. "Underinvestment and Capital Misallocation Under Sovereign Risk," Departmental Working Papers 202402, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:202402
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    Keywords

    Soveriegn default; Underinvestment; Investment externalities;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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