IDEAS home Printed from
   My bibliography  Save this paper

Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises


  • Atif R. Mian
  • Amir Sufi
  • Francesco Trebbi


Debtors bear the brunt of a decline in asset prices associated with financial crises and policies aimed at partial debt relief may be warranted to boost growth in the midst of crises. Drawing on the US experience during the Great Recession of 2008-09 and historical evidence in a large panel of countries, we explore why the political system may fail to deliver such policies. We find that during the Great Recession creditors were able to use the political system more effectively to protect their interests through bailouts. More generally we show that politically countries become more polarized and fractionalized following financial crises. This results in legislative stalemate, making it less likely that crises lead to meaningful macroeconomic reforms.

Suggested Citation

  • Atif R. Mian & Amir Sufi & Francesco Trebbi, 2012. "Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises," NBER Working Papers 17831, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17831
    Note: CF EFG POL

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    2. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    3. Veronica Guerrieri & Guido Lorenzoni, 2017. "Credit Crises, Precautionary Savings, and the Liquidity Trap," The Quarterly Journal of Economics, Oxford University Press, vol. 132(3), pages 1427-1467.
    4. Adi Brender & Allan Drazen, 2008. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries," American Economic Review, American Economic Association, vol. 98(5), pages 2203-2220, December.
    5. Midrigan, Virgiliu & Philippon, Thomas, 2011. "Household Leverage and the Recession," CEPR Discussion Papers 8381, C.E.P.R. Discussion Papers.
    6. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    7. Atif Mian & Amir Sufi & Francesco Trebbi, 2010. "The Political Economy of the US Mortgage Default Crisis," American Economic Review, American Economic Association, vol. 100(5), pages 1967-1998, December.
    8. Martha L. Olney, 1999. "Avoiding Default: The Role of Credit in the Consumption Collapse of 1930," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 319-335.
    9. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    10. Stephen Nunez, 2004. "Bankruptcy "Reform" in Congress: Creditors, Committees, Ideology, and Floor Voting in the Legislative Process," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(2), pages 527-557, October.
    11. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2011. "When Credit Bites Back: Leverage, Business Cycles, and Crises," CEPR Discussion Papers 8678, C.E.P.R. Discussion Papers.
    12. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October.
    13. Alberto Alesina & Dorian Carloni & Giampaolo Lecce, 2012. "The Electoral Consequences of Large Fiscal Adjustments," NBER Chapters,in: Fiscal Policy after the Financial Crisis, pages 531-570 National Bureau of Economic Research, Inc.
    14. Carmen M. Reinhart & Vincent Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
    15. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When?The Political Economy of Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-1.
    16. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When? On the Political Economy of Reforms," NBER Working Papers 12049, National Bureau of Economic Research, Inc.
    17. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    18. Alston, Lee J, 1984. "Farm Foreclosure Moratorium Legislation: A Lesson from the Past," American Economic Review, American Economic Association, vol. 74(3), pages 445-457, June.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. De Haas, Ralph & Djourelova, Milena & Nikolova, Elena, 2016. "The Great Recession and social preferences: Evidence from Ukraine," Journal of Comparative Economics, Elsevier, vol. 44(1), pages 92-107.
    2. Autor, David & Dorn, David & Hanson, Gordon & Majlesi, Kaveh, 2016. "Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure," Working Papers 2016:21, Lund University, Department of Economics.
    3. Frieden, Jeffry, 2015. "The political economy of adjustment and rebalancing," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 4-14.
    4. Andrea Goldstein & Alessia Amighini & Jeffry A. Frieden, 2016. "Macroeconomic Rebalancing in China and the G20," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 24(4), pages 15-33, July.
    5. David Lodge & Marta Rodriguez-Vives, 2013. "How long can austerity persist? The factors that sustain fiscal consolidations," European Journal of Government and Economics, Europa Grande, vol. 2(1), pages 5-24, June.
    6. Francesco Trebbi & Kairong Xiao, 2015. "Regulation and Market Liquidity," NBER Working Papers 21739, National Bureau of Economic Research, Inc.
    7. Ernesto Crivelli & Sanjeev Gupta & Carlos Mulas-Granados & Carolina Correa-Caro, 2016. "Fragmented Politics and Public Debt," IMF Working Papers 16/190, International Monetary Fund.
    8. Montagnoli, Alberto & Moro, Mirko & Panos, Georgios A. & Wright, Robert E., 2016. "Financial Literacy and Political Orientation in Great Britain," IZA Discussion Papers 10285, Institute for the Study of Labor (IZA).
    9. Claudia I. Dobre & Costin I. Răsăuţeanu, 2016. "Global Economic Crisis and Government Intervention," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 14-19, February.
    10. Carmen M. Reinhart & Christoph Trebesch, 2016. "Sovereign Debt Relief And Its Aftermath," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 215-251, February.
    11. Hansen, Ole-Petter Moe & Legge, Stefan, 2015. "Trading off Welfare and Immigration in Europe," Discussion Paper Series in Economics 22/2015, Norwegian School of Economics, Department of Economics.
    12. Funke, Manuel & Schularick, Moritz & Trebesch, Christoph, 2016. "Going to extremes: Politics after financial crises, 1870–2014," European Economic Review, Elsevier, vol. 88(C), pages 227-260.
    13. repec:bla:ecaffa:v:37:y:2017:i:3:p:382-396 is not listed on IDEAS
    14. Oksana Kramarenko, 2015. "The Development of Strategic Bank Lending Industries in the Context of Globalization," Economy of region, Centre for Economic Security, Institute of Economics of Ural Branch of Russian Academy of Sciences, vol. 1(3), pages 228-241.
    15. Gunes Gokmen & Tommaso Nannicini & Massimiliano Gaetano Onorato & Chris Papageorgiou, 2017. "Policies in Hard Times: Assessing the Impact of Financial Crises on Structural Reforms," DISCE - Working Papers del Dipartimento di Economia e Finanza def061, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    16. Octavia Foarta, 2016. "Politically Feasible Public Bailouts," 2016 Meeting Papers 1479, Society for Economic Dynamics.
    17. Prato, Carlo & Wolton, Stephane, 2013. "Rational Ignorance, Elections, and Reform," MPRA Paper 68638, University Library of Munich, Germany, revised 10 Dec 2015.
    18. Abuka, Charles & Alinda, Ronnie & Minoiu, Camelia & Peydr�, Jos� Luis & Presbitero, Andrea, 2017. "Financial Development and Monetary Policy: Loan Applications, Rates, and Real Effects," CEPR Discussion Papers 12171, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H1 - Public Economics - - Structure and Scope of Government

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:17831. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.