the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

sovereign default risk and the u s equity market i develop a two country general equilibrium model with firms governments and endogenous default decisions this paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of u s equity returns the intuition is that negative economic shocks deteriorate the fiscal situation of foreign governments thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth the rise in the risk of an economic slowdown abroad amplifies the direct eect of these shocks on the level and the volatility of equity returns in the u s through i a decrease in the present value of future firm earnings due to the unfavorable adjustment of the real exchange rate for u s exporters and ii a fall in u s equity prices that originates from the investors incentive to rebalance their portfolio towards risk free securities the amplification eect is strongest during periods of financial distress when the risk of corporate default is high in the u s a structural estimation of the model provides strong support for this prediction using monthly data for brazil and the u s over the period 1994 2008

default risk and risk averse international investors abstract this paper develops an endogenous default risk model for small open economies that interact with risk averse international investors whose preferences exhibit decreasing absolute risk aversion dara by incorporating risk averse investors who trade with an emerging economy the present model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets than the standard model with risk neutral investors the paper shows that if investors have dara preferences then the emerging economy s default risk capital flows and bond prices are a function not only of the fundamentals of the economy but also of the level of financial wealth and risk aversion of international investors in particular as investors become wealthier or less risk averse the emerging economy becomes less credit constrained as a result the emerging economy s default risk is lower and its bond prices and capital inflows are higher additionally with risk averse investors the risk premium in the asset prices of the sovereign countries can be decomposed into two components a base premium that compensates the investors for the probability of default and an excess premium that compensates them for taking the risk of default

the sources of sovereign risk a calibration based on levy stochastic processes abstract governments choose to issue risky or riskless debt depending on the nature of the stochastic process of output we use brownian motion and poisson shocks a modeling method in the literature on corporate default known as levy processes to approximate a decomposition of the output process into a smooth and a jump component using an eaton and gersovitz 1981 model of debt repudiation we show that the brownian part explains the counter cyclical behavior of the current account and the poisson part explains the risk of default thus enabling our model to account for key stylized facts regarding sovereign risk

commodity price risk management and fiscal policy in a sovereign default model abstract commodity prices are an important driver of fiscal policy and the business cycle in many developing and emerging market economies we analyze a dynamic stochastic small open economy model of sovereign default featuring endogenous fiscal policy and stochastic commodity revenues the model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates we quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues an event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities we evaluate the conditional and unconditional welfare gains for the representative household generated by financial derivatives and commodity indexed bonds

news sovereign debt maturity and default risk abstract leading into a debt crisis interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity suggesting that news about future economic developments may play an important role in these episodes an empirical var estimation shows that a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity a quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical var estimates the dynamics of the economy after a bad news shock share some features of a productivity shock and some features of sudden stop events however unlike during sudden stop episodes long term debt does not shield the country from bad news shocks and it may even exacerbate default risk finally an increase in the precision of news allows the government to improve its debt maturity management especially during periods of high stress in credit markets and thus face lower yield spreads while increasing the amount of debt

debt maturity without commitment i analyze how lack of commitment afiects the maturity structure of sovereign debt governments balance beneflts of default induced redistribution and costs due to income losses in the wake of a default their choice of short versus longterm debt afiects default and rollover decisions by subsequent policy makers the equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that re ect the price impact of these decisions the model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high output low or a cross default more likely these predictions are consistent with empirical evidence

the dynamics of sovereign debt crises and bailouts abstract motivated by the recent european debt crisis this paper investigates the scope for a bailout guarantee in a sovereign debt crisis defaults may arise from negative income shocks government impatience or a sunspot coordinated buyers strike we introduce a bailout agency and characterize the strategy with the minimal actuarially fair intervention which guarantees the no buyers strike fundamental equilibrium relying on the market for residual financing the intervention makes it cheaper for governments to borrow inducing them borrow more leaving default probabilities possibly rather unchanged the maximal backstop will be pulled precisely when fundamentals worsen

default settlement and signalling lending resumption in a reputational model of sovereign debt this paper develops a simple model of sovereign debt in which defaulting nations are excluded from capital markets and regain access by making partial repayments this implication of the model is consistent with the historical evidence that defaulting countries return to international loan markets soon after a settlement but after varying periods of exclusion copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

bankruptcy and delinquency in a model of unsecured debt this article documents and interprets a fact central to the dynamics of informal consumer debt default we observe that for individuals 60 90 days late on payments i 85 make payments during the next quarter and ii 40 reduce their debt to understand these facts we develop a quantitative model of debt delinquency and bankruptcy our model reproduces the dynamics of delinquency and suggests an interpretation of the data in which lenders frequently reset loan terms for delinquent borrowers typically offering partial debt forgiveness instead of a blanket imposition of the penalty rates most unsecured credit contracts specify

voluntary sovereign debt exchanges we show that some recent sovereign debt restructurings were characterized by i the absence of missed debt payments prior to the restructurings ii reductions in the government s debt burden and iii increases in the market value of debt claims for holders of the restructured debt since both the government and its creditors are likely to benefit from such restructurings we label these episodes as voluntary debt exchanges we present a model in which voluntary debt exchanges can occur in equilibrium when the debt level takes values above the one that maximizes the market value of debt claims in contrast to previous studies on debt overhang in our model opportunities for voluntary exchanges arise because a debt reduction implies a decline of sovereign default risk this is observed in the absence of any effect of debt reductions on future output levels although voluntary exchanges are pareto improving at the time of the restructuring we show that eliminating the possibility of conducting voluntary exchanges may improve welfare from an ex ante perspective thus our results highlight a cost of initiatives that facilitate debt restructurings

sovereign debt sustainability in advanced economies we develop a measure of maximum sustainable government debt for advanced economies how much investors are willing to lend to a country s government depends on the country s expected primary surplus the level and volatility of its rate of growth and how much debt the government expects to be able to raise in the future for the purpose of servicing the debt it seeks to raise today we provide a simple formula that computes a country s maximum sustainable debt msd as a function of four easy to estimate parameters we further compute a country s theoretical probability of default pd as a function of its debt to gdp ratio we nally calibrate our measures for 23 oecd countries and test the relation between sovereign yield spreads and our theoretical pd at prevailing debt levels we nd it to be strongly statistically signicant jel h63

non defaultable debt and sovereign risk abstract we quantify gains from introducing limited financing through non defaultable debt into a model of equilibrium sovereign risk for an initial sovereign spread of 4 2 introducing the possibility of issuing non defaultable debt for up to 10 of aggregate income reduces immediately the spread to 1 5 and implies a welfare gain equivalent to a permanent consumption increase of 0 8 nevertheless the spread reduction achieved by the introduction of non defaultable debt is short lived our findings shed light on different aspects of proposals to introduce common euro area sovereign bonds that could be virtually non defaultable

discretionary monetary and fiscal policy with endogenous sovereign risk abstract how does the presence of sovereign risk affect the conduct of public policy to answer this question this paper studies optimal monetary and fiscal policy without commitment for a model economy with nominal public debt and strategic sovereign default compared to an economy without the possibility of default economies with sovereign risk experience more volatile interest rates which impedes the government s ability to smooth tax rates across states risk of default also limits public debt accumulation reducing the government s incentive to use surprise inflation on average when calibrated to the united states the model predicts that a counterfactual increase in the average annual default probability from 0 to 1 lowers average inflation by 33 raises the standard deviation of inflation by 18 and increases the standard deviation of the labor income tax by 73 the transmission of exogenous shocks to real aggregate quantities is however almost unaffected by the possibility of default for example the presence of sovereign risk would increase the standard deviation of log real gdp by less than 1 in the experiment above similarly the welfare consequences of sovereign risk are found to be of negligible size as well

how can behavioral economics inform non market valuation an example from the preference reversal literature nber working paper serieshow can behavioral economics inform non market valuation an example from the preference reversal literaturejonathan e alevyjohn listwiktor adamowiczworking paper 16036http www nber org papers w16036national bureau of economic research1050 massachusetts avenuecambridge ma 02138may 2010alevy assistant professor of economics university of alaska anchorage list professor of economics university of chicago and nber adamowicz professor of economics university of alberta thanksto ian bateman daniel kahneman glenn harrison liesl koch and robert sugden for helpful comments seminar participants at several universities and conferences also provided useful feedback any errorsor omissions remain our responsibility the views expressed herein are those of the authors and donot necessarily reflect the views of the national bureau of economic research 2010 by jonathan e alevy john list and wiktor adamowicz all rights reserved short sectionsof text not to exceed two paragraphs may be quoted without explicit permission provided that fullcredit including notice is given to the source

sovereign and private default risks over the business cycle abstract sovereign debt crises are often accompanied by deep recessions with sharp declines in external credit to the private sector in a sample of emerging economies we find that both sovereign and private interest rate spreads are countercyclical this paper presents a model of a small open economy that accounts for these empirical regularities it includes private firms which finance a fraction of imports by external debt and are subject to idiosyncratic productivity risk and a government which borrows internationally and taxes firms to finance public expenditures the model gives rise to endogenous private and sovereign interest rate spreads and a dynamic feedback mechanism between sovereign and private default risks through the endogenous response of fiscal policy to adverse productivity shocks

magnitude time and risk differ similarly between joint and single evaluations arguably all choice options involve three basic attributes magnitude outcome size time of occurrence and probability of occurrence and are evaluated in one of two basic evaluation modes je joint evaluation involving comparison of multiple options and se single evaluation without comparison this research explores how reactions to the three basic attributes and their associated functions utility time discounting and probability weighting vary between the two basic evaluation modes nine studies tapping diverse contexts yield two general results first for all these attributes people are more sensitive to variations near endpoints zero magnitude no delay and 0 or 100 probability than in other regions and this differential sensitivity is more pronounced in se than in je second when faced with options involving a trade off between magnitude and time delay or between magnitude and probability risk people are both more delay averse and more risk averse in se than in je

debt dilution and sovereign default risk we measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects we calibrate a baseline model with endogenous debt duration and default risk in which debt can be diluted using data from spain we find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost 2 years eliminating dilution also increases consumption volatility but still produces welfare gains the debt covenants we study could help enforcing fiscal rules

self fulfilling debt crises what can monetary policy do this paper examines the potential for monetary policy to avoid self fulfilling sovereign debt crises we combine a version of the slow moving debt crisis model proposed by lorenzoni and werning 2014 with a standard new keynesian model monetary policy could preclude a debt crisis through raising inflation and output and lowering the real interest rate these reduce the real value of outstanding debt and the cost of new borrowing and increase tax revenues and seigniorage we determine the optimal path of inflation required to avoid a self fulfilling debt crisis stronger price rigidity implies more sustained inflation

beliefs and long maturity sovereign debt abstract a novel form of strategic complementarities is explored in a standard quantitative model of long maturity sovereign debt discrepancies in long run beliefs dilute current prices differently negative long run beliefs become self fulfilling if the sovereign optimally borrows more and defaults more frequently in the face of worse prices a strong curvature in the flow utility is an important ingredient in generating this response the intuition bears out both through a multiplicity of markov equilibria and in sunspot equilibria that mimic trigger strategies in repeated games in the benchmark model average spreads are roughly 67 higher 200 basis points and debt to gdp ratios are roughly 9 higher 5 percentage points when beliefs are pessimistic the model also reveals limitations to third party coordination of expectations as a policy tool

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

welfare implications of the bankruptcy reform act of 1999 abstract in recent years personal bankruptcy has become an important issue to consumers creditors and legislators alike over 40 billion dollars of unsecured debt were discharged in 1998 by 1 44 million households these losses have led legislators to propose a variety of changes in bankruptcy law the most important and recent of which is the bankruptcy reform act of 1999 ba99 i develop a dynamic stochastic general equilibrium model of personal bankruptcy to investigate the trade off between the consumption smoothing role of bankruptcy and the interest rate and deadweight costs it imposes i find that stringent means tests would reduce filing rates only slightly and would have only modest welfare consequences on the other hand the elimination of bankruptcy altogether is found to have substantial benefits this result is robust to income shock persistence and to stringency in the application of means tests

synthetic or real the equilibrium effects of credit default swaps on bond markets we provide a model of nonredundant credit default swaps cdss building on the observation that cdss have lower trading costs than bonds cds introduction involves a trade off it crowds out existing demand for the bond but improves the bond allocation by allowing long term investors to become levered basis traders and absorb more of the bond supply we characterize conditions under which cds introduction raises bond prices the model predicts a negative cds bond basis as well as turnover and price impact patterns that are consistent with empirical evidence we also show that a ban on naked cdss can raise borrowing costs

health economics worldwide i issues in health insurance 1 pricing and imperfections in the medical care market place 2 how can we prevent cream skimming in a competitive health insurance market the great challenge for the 90s 3 the impact of utilization review on costs and utilization 4 the normative and positive economics of minimum health benefits ii criteria for allocating health care resources 1 cost effectiveness analysis of strategies for screening prostatic cancer 2 the validity of the mimic health index some empirical evidence 3 welfare economics and cost utility analysis iii administrative and market allocation in health care 1 excess demand and patient selection for heart and liver transplantation 2 non price allocative procedures scottish solutions to a national health service problem 3 priorities among waiting list patients 4 consumer information price and nonprice competition among hospitals iv health care in the political arena 1 cost containment in health care justification and consequences 2 political economy of hospital financing 3 a pooled cross sectional analysis of the health care expenditure of the oecd countries 4 is there a sisyphus syndrome in health care 5 deaths from gastrointestinal cancer in mexico probable cause for water sampling index of names index of subjects

sovereign defaults information investment and credit abstract why would a sovereign government immune from bankruptcy procedures and with few assets that could be seized in the event of a default ever repay foreign creditors and correspondingly why do foreign creditors lend to sovereigns this paper finds general conditions under which even in the absence of sanctions lending to sovereigns can emerge in a single shot game furthermore it shows that positive borrowing can be sustained both in pooling and separating equilibria in this way it makes clear that neither sanctions nor reputation considerations the two classical explanations are necessary to enforce repayment information revelation is the crucial mechanism for these results the repayment default decision is interpreted as a signal used by the government to communicate information to domestic and foreign agents about the fundamentals of the economy governments repay to affect agents expectations about them a default through its effect on expectations about fundamentals can generate a decline in foreign and domestic investment and a credit crunch in domestic credit markets governments repay to avoid these costs but may default in equilibrium when hit by a negative shock

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

sovereign debt renegotiation and credit default swaps abstract a credit default swap cds contract provides insurance against default this paper incorporates the contract into a sovereign default model and demonstrates that the existence of a cds market results in lower default probability higher debt levels and lower financing costs for the country uncertainty over the insurance payout when the debt is renegotiated explains why in the data as the output declines the cds spread becomes lower than the bond spread finally my results show that the 2012 cds naked ban that decreased the levels of cds for european countries is a welfare reducing policy

financial integration and international risk sharing abstract conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk there is little evidence however that countries have increased risk sharing despite widespread financial liberalization we show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets while actual markets are far from frictionless financial contracts are incomplete and contract enforceability is limited when countries remove official capital controls default risk is still present as an implicit barrier to capital flows if default risk were eliminated capital flows would be six times greater and international risk sharing would increase substantially

slow moving debt crises we study slow moving debt crises self fulfilling equilibria where high interest rates due to fears of higher future default leads to a gradual but faster accumulation of debt ultimately validating investors fears we show that slow moving crises arise in a variety of settings both when fiscal policy follows a given rule or when it is chosen by an optimizing government we discuss how multiplicity is avoided for low debt levels for sufficiently responsive fiscal policy rules and for long enough debt maturities when the equilibrium is unique debt dynamics are characterized by a tipping point below which debt fall and stabilizes and above which debt and default rates grow we provide game theoretic foundations for our approach

decentralized borrowing and centralized default abstract in the past foreign borrowing by developing countries was comprised almost entirely of government borrowing however private firms and individuals in developing countries now borrow substantially from foreign lenders it is often asserted that this surge in private sector borrowing generates excessive borrowing and frequent sovereign defaults in developing countries this paper analyzes the impact of decentralized borrowing using a quantitative model in which private agents decide how much to borrow and the government decides whether to default relative to a model in which the government determines both the level of borrowing and whether to default decentralized borrowing drives up aggregate credit costs and sovereign default risk and reduces aggregate welfare interestingly decentralized borrowing may lead to either too much or too little debt in equilibrium depending on the severity of default penalties

the aggregate impact of household saving and borrowing constraints designing a field experiment in uganda abstract we develop a model of households with multiple needs smoothing shocks financing investment and constraints limited credit self control issues in order to examine the nature of household s financing constraints in a developing country and the impact of relaxing them we show that increased access to credit has very different implications for the aggregate model economy depending on its form asset financed or cash we then illustrate how a short term increase in access to loans leads to very distinct behavior in the short run the relevance of the model can be evaluated using a field experiment which we are currently implementing in uganda

asset backed contracts and sovereign risk abstract a fundamental problem with sovereign default is the lack of a legal enforcement mechanism since the 1920s there have been an ongoing set of initiatives undertaken by the league of nations and the unctad to set international laws on borrowing and lending standards all of which have failed to address the unenforceability problem this paper proposes to use asset backed contracts where the usufruct of the asset transfers to the asset holder unlike conventional sovereign borrowing there are international laws governing asset backed contracts which allow the international assets of a country to be seized this paper exemplifies on the idea that asset backed contracts which are also widely practiced in islamic finance can provide a solution to unenforceable sovereign debt contracts the paper focuses specifically on argentina which has defaulted twice in 13 years if argentina had utilized asset backed contracts prior to its 2001 debt default it would have gained from the following advantages higher debt to gdp ratios larger welfare gains lower probability of default and thus lower borrowing costs

perestrojka in the dutch health care system a demonstration project for other european countries abstract the dutch government and parliament have recently decided to radically reform the dutch health care system direct government control over prices and productive capacities will have to make way for regulated competition among insurers and among providers there appear to be some similarities between economic problems associated with the perestrojka in eastern europe and the perestrojka that is taking place in the dutch health care system in both cases serious problems may arise as the result of the absence of consumer information the absence of cost related prices the absence of antitrust policy and the absence of market oriented management each of these issues will be discussed it will be concluded that other western or eastern european countries can learn interesting lessons from the demonstration project that is taking place in the netherlands

consumption savings decisions with quasi geometric discounting we study the consumption savings problem of an infinitely lived rational consumer who has time inconsistent preferences in the form of quasi geometric discounting the consumer operates a weakly concave production function and must simply divide current resources into current consumption and savings there is no uncertainty a solution to the consumer s problem is a subgame perfect equilibrium of a dynamic game between the consumer s successive selves we show that this game has a continuum of equilibria in stationary markov strategies not only is the stationary point of the consumer s asset holdings indeterminate but each stationary point has a continuum of dynamic paths converging to it the savings policy rules underlying these dynamic paths are step functions

unique equilibrium in the eaton gersovitz model of sovereign debt abstract a common view of sovereign debt markets is that they are prone to multiple equilibria we prove that to the contrary markov perfect equilibrium is unique in the widely studied model of eaton and gersovitz 1981 and we discuss multiple extensions and limitations of this finding our results show that no improvement in a borrower s reputation for repayment can be self sustaining thereby strengthening the bulow and rogoff 1989 argument that debt cannot be sustained by reputation alone

budget effects of health care vouchers abstract several proposals aim at developing private insurance markets as a substitute for government financing of health care spending reform proposals typically include the use of the fiscal system we look at the effects of vouchers as an instrument for inducing individuals to opt out from public health insurance plans we show that vouchers do lead individuals mainly good health risks to opt out from the social program this is accompanied by an overall increase in government spending due to transfers to be made unless significant savings due to moral hazard control are available this may run against the government s objective of public spending containment the result is fairly general and does not depend on the existence of a solidarity component as it has been commonly argued

public health insurance and optimal income taxation abstract if individuals differ not only in their inherent capacity to earn income but also in the probability that they will fall ill can subsidized public health insurance be justified on the grounds that it serves as an efficient tool to redistribute welfare this question is analyzed in a model where the social welfare function is a weighted average of individual expected utilities and where taxation is by a linear income tax the answer is yes except in certain special cases

sovereign debt restructurings preemptive or post default sovereign debt restructurings can be implemented preemptively prior to a payment default we code a comprehensive new dataset and nd that preemptive restructurings i are frequent 38 of all deals 1978 2010 ii have lower haircuts iii are quicker to negotiate and iv see lower output losses to rationalize these stylized facts we build a quantitative sovereign debt model that incorporates preemptive and post default renegotiations the model improves the t with the data and explains the sovereign s optimal choice preemptive restructurings occur when default risk is high ex ante while defaults occur after unexpected bad shocks empirical evidence supports these predictions jel f34 f41 h63

sovereign default and maturity choice abstract this study develops a novel model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve first sovereign debt duration and maturity generally exceed one year and co move positively with the business cycle second sovereign yield spread curves are usually non linear and upward sloped and may become non monotonic and inverted during a period of high credit market stress such as a default episode finally output volatility impatience risk aversion and especially sudden stops are key determinants of maturity both in our model and in the data

explaining how preferences change across joint versus separate evaluation abstract this paper examines how preferences for outcomes change across joint versus separate evaluation of alternatives in joint evaluation two or more options are presented and evaluated simultaneously in separate evaluation each option is presented and evaluated separately we review a growing body of evidence demonstrating this type of preference shift and discuss how it is different from existing biases and preference reversals documented in the literature we then review and integrate three competing explanations for this type of preferential inconsistency

sovereign credit spreads under good bad governance abstract this paper explores how sovereign credit spreads vary with the level of governance an analysis of 74 countries over the 2001 2016 period shows that sovereign credit default swap cds spreads decrease with government effectiveness particularly in countries exhibiting severe default risk high indebtedness and poor economic conditions we formulate a theoretical explanation for these findings using a structural model in which governments adjust default and debt policies based on their abilities to collect and use fiscal revenues the theory posits that more effective governments have less incentive to default and thus benefit from narrower credit spreads although they may choose higher indebtedness levels

credit default swaps and the empty creditor problem the empty creditor problem arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy we analyze this problem from an ex ante and ex post perspective in a formal model of debt with limited commitment by comparing contracting outcomes with and without insurance through credit default swaps cds we show that cds and the empty creditors they give rise to have important ex ante commitment benefits by strengthening creditors bargaining power they raise the debtor s pledgeable income and help reduce the incidence of strategic default however we also show that lenders will over insure in equilibrium giving rise to an inefficiently high incidence of costly bankruptcy we discuss a number of remedies that have been proposed to overcome the inefficiency resulting from excess insurance jel g30 g32 g33 one of the most significant changes in the debtor creditor relationship in the

heterogeneous borrowers in quantitative models of sovereign default we extend the model used in recent quantitative studies of sovereign default allowing policymakers of different types to stochastically alternate in power we show that a default episode may be triggered by a change in the type of policymaker in office and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions under high political stability political turnover enables the model to generate a weaker correlation between economic conditions and default decisions a higher and more volatile spread and lower borrowing levels after a default episode

u s consumer bankruptcy choice the importance of general equilibrium effects abstract we study the implications of u s personal bankruptcy rules for resource allocation and welfare our analysis shows that general equilibrium considerations along with bankruptcy chapter choice and production matter crucially for the effects of policy reform contrary to previous work we find that completely eliminating bankruptcy provisions causes significant declines in output and welfare by reducing capital formation and labor input furthermore subjecting chapter 7 filers to means testing as suggested by recent legislative proposals would not improve upon current bankruptcy provisions and at best leave aggregate filings output and welfare unchanged however we do find that an alternative tightening of chapter 7 in the form of lower asset exemptions can increase economic efficiency

the stock of external sovereign debt can we take the data at face value abstract the stock of sovereign debt is typically measured at face value defined as the undiscounted sum of future principal repayments face values are misleading when debts are issued with different contractual forms or maturities in this paper we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity we show that our alternative measures 1 paint a very different quantitative and in some cases also qualitative picture of the stock of developing country external sovereign debt 2 often invert rankings of indebtedness across countries which historically defined eligibility for debt forgiveness 3 indicate that the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by roughly 50 once model consistent measures of debt are used 4 show how the spread of aggregation clauses in debt contracts that award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts and 5 illustrate how countries have manipulated their debt issuance to meet fiscal targets written in terms of face values

sovereign risk interbank freezes and aggregate fluctuations abstract this paper shows how spillovers from sovereign risk to banks access to wholesale funding establish a bank sovereign nexus in a dynamic stochastic general equilibrium set up heterogeneous banks give rise to an interbank market where government bonds are used as collateral government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops these spillovers by impeding interbank intermediation lower the penalty from defaulting due to an interbank freeze during a recession and propagate aggregate shocks to the macroeconomy the model is calibrated using greek data and is capable of reproducing stylized facts from the european sovereign debt crisis in an application we show that the ecb s non standard financing operations mitigate the adverse feedback mechanism

long duration bonds and sovereign defaults abstract this paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long duration bonds this contrasts with previous studies which assume the government can borrow using bonds that mature after one quarter we show that when we assume that the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one quarter bonds this narrows the gap between the predictions of the model and the data which indicates that the introduction of long duration bonds may be a useful tool for future research about emerging economies our analysis is also relevant for the study of other credit markets

income inequality and sovereign default abstract in this paper we study how income inequality matters for government borrowing and default decisions we extend a standard endogenous sovereign debt default model to allow for heterogeneous agents and stochastic variability in the dispersion of income we calibrate the model to match a number of stylized facts for argentina we show that i rising income inequality within a country increases the probability of default significantly ii the effect of output shocks is larger than the effect of inequality shocks iii the joint effect of these two shocks can generate a high default probability consistent with the argentine data iv the model can match the high volatility of consumption by the poor relative to the rich and v more progressive income taxes lead to lower default risk

fiscal rules and government borrowing costs international evidence we find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985 2010 we apply a variety of propensity score matching methods to address the self selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets the results are robust to changes in country sample and alternative estimation methodology and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the risk premium on government debt that compensates lenders for this possibility jel e43 g12 h60

holdouts in sovereign debt restructuring a theory of negotiation in a weak contractual environment negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement the country cannot borrow internationally until it settles with all creditors delay arises in equilibrium as creditors engage in strategic hold up the model a rms the conventional wisdom that delay increases with more creditors and with the advent of vulture creditors contrary to conventional wisdom putting collective action clauses into bond contracts may increase delay via free riding on negotiation costs even while preventing strategic holdup and reducing total negotiation costs secondary debt markets consolidate debt with high and disperse debt with low creditor bargaining power whether secondary markets reduce or increase delay depends on the interaction between strategic holdup and debt

sovereign default interest rates and political uncertainty in emerging markets abstract a large body of the empirical literature shows that high turnover rates length of tenure of policymakers and the degree of conflict within a country affects sovereign spreads debt and default rates we help to rationalize such claims by including these political features in a dynamic stochastic small open economy model of sovereign debt and default in this way we offer a complementary approach to the econometric analyses in the literature consistent with the data the quantitative analysis shows that politically unstable and more polarized economies experience higher default rates and larger level and volatility of sovereign interest rate spreads

credit default swaps and risk shifting credit default swaps cdss are thought to ease borrowing by protecting lenders against default this paper develops a model of the demand for cds when borrowers choose the riskiness of investment and verification is imperfect the model shows that cdss may lead to risk shifting increasing the probability of default our model provides new insights into the role of cds during the recent financial crisis

organizing the health insurance market this paper presents a new approach to organizing universal health insurance first the government divides the entire population into many large groups then the government creates a federal health insurance system healthfed modeled on the federal reserve system to fill the role now played by the benefits office of a large firm the healthfed would create a short menu of alternatives solicit bids for insuring the entire group and price alternatives there would be redistribution between groups and pricing of alterna tives to reflect optimal social insurance principles there would be no connection between health insurance and employment it may seem odd that this presidential address is my first publication in health economics at the time when i might have been working on an alternative address i was chair of an expert panel for the advisory council on social security looking at issues in both retirement income and medical care 2 in the process of this work i have come up with a new approach to organizing universal health insurance that is the subject of this paper before starting on health insurance i will say a few words about a wider context offering what i will say as an example in that setting 3 a great deal of attention has been focused on the exciting issue of reorganizing economies dropping central planning commonly economists from those countries em brace capitalism or more specifically laissez faire competition with an enthusi asm which exceeds that ofwestern economists although not necessarily western businessmen yet laissez faire capitalism has received little serious support in the west for a very long time we all know the fundamental welfare theorem which shows many ways that capitalism can be imperfect we have also seen a growth in discussion and analysis of the many ways governments can mess up resource allocation the real question is the design of arrangements that try to integrate the things that each type of institution does better this is hard for two reasons one is that it is in the realm of second best with many constraints the more the constraints the harder the analysis the second is that we do not have good positive theories of government behavior good examples yes good theories no thus the analysis is more intuitive less theory driven than in our picture of private markets but also in our private market analyses we have been greatly complicating our picture recognizing all sorts of information imperfec tions that affect the way that private markets work so i will present to you a proposal for universal health insurance meant to combine something that