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Public Debt and the Threat of Secession

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  • Rhea Molato

Abstract

This paper examines public debt as a strategic instrument in preventing secession. Using a game theoretic model, it shows that debt can be used to preempt a country's separation if the seceding region's potential gain from independence is strictly decreasing in debt. This paper identifies sufficient conditions under which this property holds. First, the indirect effect of debt on the seceding region's potential gain from independence must be negative. Second, the indirect e¤ect of debt must be stronger than its direct effect. When the seceding region's potential gain from independence is decreasing in debt, then it can be prevented from leaving the union by setting higher levels of debt until it reaches a certain threshold level. This paper also finds that the ma jority region may use debt as a strategic instrument to preserve the union if it is better off in a country with debt than as a separate state with savings.

Suggested Citation

  • Rhea Molato, 2015. "Public Debt and the Threat of Secession," Working Papers tax-mpg-rps-2015-04, Max Planck Institute for Tax Law and Public Finance.
    • Handle: RePEc:mpi:wpaper:tax-mpg-rps-2015-04
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    More about this item

    Keywords

    secession; debt; sovereign debt; fiscal policy;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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