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Sovereign Debt - Election Concerns and the Democratic Disadvantage

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  • Amrita Dhillon
  • Andrew Pickering
  • Tomas Sjöström

Abstract

We examine default decisions under different political systems. If democratically elected politicians are unable to make credible commitments to repay externally held debt, default rates are inefficiently high because politicians internalize voter utility loss from repayment. Politicians who are motivated by electoral concerns are more likely to default in order to avoid voter utility losses, and, since lenders recognize this, interest rates and risk premiarise. Therefore, democracy potentially confers a credit market disadvantage. However, farsighted institutions that take into account how interest rates respond to default risk can ameliorate the disadvantage. Using a numerical measure of institutional farsightedness obtained from the Government Insight Business Risk and Conditions database, we …find that the observed relationship between credit-ratings and democratic status is indeed strongly conditional on farsightedness. With myopic institutions, democracy is estimated to cost on average about 2.5 investment grades. With farsighte institutions there is, if anything, a democratic advantage.

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  • Amrita Dhillon & Andrew Pickering & Tomas Sjöström, 2016. "Sovereign Debt - Election Concerns and the Democratic Disadvantage," Discussion Papers 16/13, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:16/13
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    Cited by:

    1. Amrita Dhillon & Andrew Pickering & Tomas Sjöström, 2019. "Sovereign debt: election concerns and the democratic disadvantage," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 320-343.
    2. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.
    3. Sayantan Ghosal & Marcus Miller, 2019. "Introduction to the special issue on sovereign debt restructuring," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 309-319.
    4. Calomiris, Charles W. & Tsoulouhas, Theofanis, 2022. "Bailing out conflicted sovereigns," Journal of Financial Intermediation, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Sovereign debt; Default; Risk premia; Autocracy; Democracy; Institutions;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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