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Crony Capitalism and Sovereign Default

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  • Victor Vaugirard

Abstract

Cronyism provides policymakers with marked incentives to repay sovereign debt. This takes place at the expense of the average citizen who bears both steep costs of debt repudiation and high costs of debt service, as clientelism increases both financial fragility and the debt burden. The paper sets up a model of strategic debt default that nails down this point, with political distortions and where a representative agent can dismiss the government and overrule its decision. Economic hard times provide an opportunity to implement reforms fighting clientelism, as the implicit coalition between groups of cronies may break down. A model is built along these lines, which highlights cross-country contagion of debt repudiation. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Victor Vaugirard, 2005. "Crony Capitalism and Sovereign Default," Open Economies Review, Springer, vol. 16(1), pages 77-99, January.
    • Handle: RePEc:kap:openec:v:16:y:2005:i:1:p:77-99
    DOI: 10.1007/s11079-005-5333-0
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    3. Chwieroth, Jeffrey M. & Walter, Andrew, 2022. "Neoliberalism and banking crisis bailouts: distant enemies or warring neighbors?," LSE Research Online Documents on Economics 111871, London School of Economics and Political Science, LSE Library.

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