Intergenerational Conflict and International Risk Sharing

Existing models of foreign debt and insurance capacity assume that the costs and benefits of default are evenlydistributed across agents in the defaulting country. To study how tensions among different groups inside a country affect its sovereign risk management I consider an economy whose agents differ in their life spans. This makes the cost and benefits of default to be different across generations. The country is able to come up with a positive level of insurance by linking intergenerational transfers to the default decision of its citizens. This results is found both for the case of a Ramsey planner who cares for all present and future generations, and when decisions are taken by majority vote among living generations.