Inequality and Sovereign Default under Democracy

Journal of Economics and Financial Analysis

Yong Kyun Kim¹ 

[1] University of the Pacific

关键词: Sovereign Debt;    Sovereign Default;    Democracy;    Income Inequality;    Strategic Interaction;    Signaling Game.;   

DOI  :  10.1991/jefa.v1i1.a5

学科分类：社会科学、人文和艺术（综合）

来源: Tripal Publishing House

【 摘 要 】

Do differences in the inequality of income affect the likelihood that democratic governments decide not to honor their foreign debt contracts? I argue that sovereign default involves an intertemporal tradeoff between an immediate consumption boost and a future tax increase. Since a poorer voter internalizes less of the future cost of default, as the median is poorer, the majority’s demand for default increases. Therefore, greater income inequality implies a higher default risk. I then present a signaling game that models strategic selection that a sovereign must go through to get to the default decision node. I show that sovereign default is most likely to actually occur when the level of income inequality is intermediate. The intuition is that sovereign default occurs when risky sovereigns successfully induce creditors to provide a loan, but the most risky ones are among those least able to do so. Empirical findings support the claim.

【 授权许可】

CC BY-NC-ND