Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271034 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
Working Paper Series No. 13
Publisher: 
University of Konstanz, Cluster of Excellence "The Politics of Inequality", Konstanz
Abstract: 
This paper studies how distributional and electoral concerns shape sovereign default incentives within a quantitative model of sovereign debt with heterogeneous agents and non-linear income taxation. The small open economy is characterized by a two-party system in which the left-wing party has a larger preference for redistribution than the right-wing party. Political turnover is the endogenous outcome of the electoral process. Fiscal policy faces a tradeoff: On the one hand, the government has incentives to fi- nance redistribution via external debt to avoid distortionary income taxation. On the other hand, the accumulation of external debt raises the cost of borrowing. Quanti- tative findings suggest that the left-wing party implements a more progressive income tax, is more prone to default, and has a lower electoral support than the right-wing party due to worse borrowing conditions and the distortionary effects of income taxa- tion. In equilibrium, electoral uncertainty raises sovereign default risk.
Subjects: 
sovereign debt and default
inequality
redistribution
political economy
JEL: 
F34
H63
E62
F41
D72
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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