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Sovereign debt: election concerns and the democratic disadvantage

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  • Dhillon, Amrita

    (King’s College, London)

  • Pickering, Andrew

    (University of York)

  • Sjöström, Tomas

    (Rutgers University)

Abstract

We re-examine the concept of ‘democratic advantage’ in sovereign debt ratings when optimal repayment policies are time-inconsistent. If democratically elected politicians are unable to make credible commitments then default rates are inefficiently high, so democracy potentially confers a credit market disadvantage. Institutions that are shielded from political pressure may ameliorate the disadvantage by adopting a more farsighted perspective. Using a numerical measure of institutional farsightedness obtained from the Global Insight Business Risk and Conditions database, we find that the observed relationship between credit-ratings and democratic status is strongly conditional on farsightedness. With myopic institutions, democracy is associated with worsened credit ratings on average by about 3 investmentgrades. With farsighted institutions there is, if anything, a democratic advantage.

Suggested Citation

  • Dhillon, Amrita & Pickering, Andrew & Sjöström, Tomas, 2019. "Sovereign debt: election concerns and the democratic disadvantage," CAGE Online Working Paper Series 422, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:422
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    Cited by:

    1. Amrita Dhillon & Andrew Pickering & Tomas Sjöström, 2019. "Sovereign debt: election concerns and the democratic disadvantage," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 320-343.
    2. Sayantan Ghosal & Marcus Miller, 2019. "Introduction to the special issue on sovereign debt restructuring," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 309-319.
    3. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Sovereign debt; Default; Risk premia; Autocracy; Democracy; Institutions JEL Classification: H63; F55; D72; D82; H75; O43; C72.;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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