Inequality and Sovereign Default under Democracy
Journal Title: Journal of Economics and Financial Analysis - Year 2017, Vol 1, Issue 1
Abstract
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.
Authors and Affiliations
Yong Kyun Kim
Keywords
Related Articles
- EP ID EP246295
- DOI -
- Views 103
- Downloads 0
Launch Decisions of Pharmaceutical Companies
This paper models the launch decision of pharmaceutical companies in regard to new drugs and country markets. New drugs are launched with a delay or not launched at all in many countries. Considering that many of these n...
Nonprofit Organizations in Disaster Response and Management: A Network Analysis
This paper tracks changes in the national disaster management system with regard to the nonprofit sector by looking at the roles ascribed to nonprofit organizations in the Federal Response Plan (FRP), National Response P...
Asset and Liability Management: Analysis on the Dependence of Assets and Liabilities in Turkish Banking Sector
Asset liability management (ALM) is the traditional risk management practice in banking. ALM is the coordinated and integrated management of assets and liabilities. Some studies argue that ALM lost importance due to the...
The causality between Financial Development and Economic Growth in Ethiopia: Supply Leading vs Demand Following Hypothesis
This paper investigates linkage between financial development and economic growth in Ethiopia during the period from 1975 to 2016 using Autoregressive Distributed Lag (ARDL) approach. The paper also schedules Vector Erro...
Impact of Health Care Employees’ Job Satisfaction on Organizational Performance Support Vector Machine Approach
This study is undertaken to search for key factors that contribute to job satisfaction among health care workers, and also to determine the impact of these underlying dimensions of employee satisfaction on organizational...