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Living in Infamy: Bad Reputations in Emerging Markets

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  • Zachary Stangebye
  • Mark L. J. Wright

Abstract

We present a model of sovereign borrowing in the presence of default risk and asymmetric information. Optimizing sovereigns come in two persistent types with different levels of patience and hence different proclivities to default and borrow. In a stylized model, we construct a pooling equilibrium that is 'infamous' in the sense that the patient sovereign is constrained to borrow like the impatient sovereign on the equilibrium path. We argue that this provides an explanation for the observed lack of private capital markets for many low- and middle-income countries, and use the model to evaluate proposed policy interventions aimed at building a good reputation for such countries.

Suggested Citation

  • Zachary Stangebye & Mark L. J. Wright, 2026. "Living in Infamy: Bad Reputations in Emerging Markets," Working Papers 2026-012, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:103431
    DOI: 10.20955/wp.2026.012
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    References listed on IDEAS

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    1. Phan, Toan, 2017. "A model of sovereign debt with private information," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 1-17.
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    Keywords

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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