This paper proposes a stylized two-period two-country model illustrating the role played by the distribution of domestic wealth in determining a country’s level of access to international lending. We model sovereign debt redemption policy as the outcome of the interaction between the domestic government and interest groups (locals and foreigners) with conflicting preferences about debt repayment (common agency framework). The main result produced by our model is that, although discriminatory taxation against foreign bond-holders is not available and foreigners are allowed entering the process of buying influence, default is always ex-post observed when all domestic interests are represented and a share of sovereign debt is detained by foreigners. On the contrary, by assuming selective participation to lobbying, we show that a borrowing country’s access to international capital markets increases with inequality in the domestic distribution of wealth.
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Paper provided by Sapienza University of Rome, Department of Public Economics in its series Working Papers with number
105.
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F34 - International Economics - - International Finance - - - International Lending and Debt Problems H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy