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Sovereign debt capacity and the distribution of domestic wealth: a common agency problem

Author

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  • Debora Di Gioacchino
  • Sergio Ginebri
  • Laura Sabani

Abstract

This paper proposes a stylized two-period two-country model illustrating the role played by the distribution of domestic wealth in determining a country’s level of access to international lending. We model sovereign debt redemption policy as the outcome of the interaction between the domestic government and interest groups (locals and foreigners) with conflicting preferences about debt repayment (common agency framework). The main result produced by our model is that, although discriminatory taxation against foreign bond-holders is not available and foreigners are allowed entering the process of buying influence, default is always ex-post observed when all domestic interests are represented and a share of sovereign debt is detained by foreigners. On the contrary, by assuming selective participation to lobbying, we show that a borrowing country’s access to international capital markets increases with inequality in the domestic distribution of wealth.

Suggested Citation

  • Debora Di Gioacchino & Sergio Ginebri & Laura Sabani, 2007. "Sovereign debt capacity and the distribution of domestic wealth: a common agency problem," Working Papers 105, University of Rome La Sapienza, Department of Public Economics.
  • Handle: RePEc:sap:wpaper:wp105
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    Keywords

    Public debt; Government default; Political economy; Political support; Special interests; Common agency.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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