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Leader reputation and default in sovereign debt

By Amrita Dhillon and Tomas Sjöström

Abstract

This paper compares default incentives in competitive sovereign debt markets when leaders can be either democratically elected or dictators. When leaders can be replaced as in democracies, the incentives for repayment are mainly the ego rents from office and the possibility of getting a corrupt leader from replacement. In a dictatorship, on the other hand, the cost of not repaying loans is the permanent loss of reputation and the loss of future access to credit. There is a trade off between repayment and risk sharing. We show, counter-intuitively, that when ego rents are low, and value of reputation to dictators is high, then democracies repay more often and have lower risk premia than dictatorships

Topics: HJ, JF
Publisher: University of Warwick, Department of Economics
Year: 2009
OAI identifier: oai:wrap.warwick.ac.uk:1331

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