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Underinvestment and capital misallocation under sovereign risk

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  • Esquivel, Carlos

Abstract

Capital and its sectoral allocation affect default incentives. Under general assumptions, default risk is decreasing in the total stock of capital and increasing in the share of capital allocated to non-tradable production. This implies that when competitive households make all investment decisions capital has two externalities: a capital-stock externality and a portfolio externality. These hamper the ability of a benevolent government to make optimal borrowing and default decisions and are exacerbated during periods of distress. Competitive equilibria feature underinvestment, larger non-traded sectors, more default, and lower debt and consumption than a centralized planner’s allocation.

Suggested Citation

  • Esquivel, Carlos, 2024. "Underinvestment and capital misallocation under sovereign risk," Journal of International Economics, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:inecon:v:151:y:2024:i:c:s0022199624001004
    DOI: 10.1016/j.jinteco.2024.103973
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    More about this item

    Keywords

    Sovereign default; Underinvestment; Investment externalities;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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