Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

@inproceedings{DErasmo2013DistributionalII,
  title={Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default},
  author={Pablo D'Erasmo and Enrique G. Mendoza},
  year={2013}
}
Europe’s debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt- and non-debt holders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as concentration of debt ownership rises. A government favoring… CONTINUE READING