Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283997 
Year of Publication: 
2024
Series/Report no.: 
Working Paper No. 2024-02
Publisher: 
Rutgers University, Department of Economics, New Brunswick, NJ
Abstract: 
Capital and its sectoral allocation affect default incentives. Under general assumptions, default risk is decreasing in the total stock of capital and increasing in the share of capital allocated to non-tradable production. This implies that when competitive households make all investment decisions capital has two externalities: a capital-stock externality and a portfolio externality. These hamper the ability of a benevolent government to make optimal borrowing and default decisions and are exacerbated during periods of distress. Competitive equilibria feature underinvestment, larger non-traded sectors, more default, and lower debt and consumption than a centralized planner's allocation.
Subjects: 
Sovereign default
Underinvestment
Investment externalities
JEL: 
F34
F41
H63
Document Type: 
Working Paper

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