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@techreport{NBERw19477,
 title = "Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default",
 author = "D'Erasmo, Pablo and Mendoza, Enrique G",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "19477",
 year = "2013",
 month = "September",
 doi = {10.3386/w19477},
 URL = "http://www.nber.org/papers/w19477",
 abstract = {Europe’s debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt- and non-debt holders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as concentration of debt ownership rises. A government favoring bond holders can also sustain debt, with debt rising as ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or a second asset.},
}