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An Agency Theory Approach to Sovereign Debt Crisis

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  • Guangdi Chang
  • Fulwood Chen

Abstract

Governments are expected to be a stabilizing force when the economy is in trouble, but recently they are a source of chaos. The cause behind the sovereign debt crisis is debt that far exceeds a government’s ability to repay. Why do governments of debt-ridden countries lose the sense of risk that unlimited accumulation of debt would bring their countries to the brink of insolvency? Economic factors alone can not provide a complete explanation. This paper combines agency theory with studies on public finance to develop a model to elucidate a government’s behavior in public finance. We find that too much political concern underlies irresponsible fiscal polices. Enhancing the independence of budget offices and intensifying the transparency of public finance can be prescriptions to contain the reoccurrence of sovereign debt crisis.

Suggested Citation

  • Guangdi Chang & Fulwood Chen, 2013. "An Agency Theory Approach to Sovereign Debt Crisis," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(5), pages 123-134.
    • Handle: RePEc:ibf:ijbfre:v:7:y:2013:i:5:p:123-134
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    References listed on IDEAS

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    More about this item

    Keywords

    Budget Deficits; Deficit/GDP ratio; Sovereign Debt Crisis;
    All these keywords.

    JEL classification:

    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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