TY  - JOUR
AU  - D'Erasmo, Pablo
AU  - Mendoza, Enrique G
TI  - Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19477
PY  - 2013
Y2  - September 2013
DO  - 10.3386/w19477
UR  - http://www.nber.org/papers/w19477
L1  - http://www.nber.org/papers/w19477.pdf
N1  - Author contact info:
Pablo D'Erasmo
Federal Reserve Bank of Philadelphia
Research Department
Ten Independence Mall, Philadelphia PA 19106
E-Mail: pabloderasmo@gmail.com

Enrique G. Mendoza
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215-898-7701
E-Mail: egme@sas.upenn.edu
M1  - published as Pablo D'Erasmo, Enrique G. Mendoza. "Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default," in Sebnem Kalemli-Ozcan, Carmen Reinhart, and Kenneth Rogoff, organizers, "Sovereign Debt and Financial Crises" Wiley, Journal of the European Economic Association 14(1) (2016)

AB  - 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.
ER  -