Journal Article


in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 1, pages 415-415
Published in print January 2010 | ISSN: 0034-6527
Published online January 2010 | e-ISSN: 1467-937X | DOI:

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The publisher regrets the omission of the following paragraph and the references made therein from the end of Section 2 of “Sovereign Debt without Default Penalties” by Alexander Guembel and Oren Sussman, published in The Review of Economic Studies, 76 (4), 1295–1318.

Another related branch of the literature considers sovereign risk arising when a government takes an action to expropriate foreigners who are in bilateral private contracts with domestic agents. Tirole (2003) investigates a government's incentives to take a costly action that affects the ability of domestic corporations to repay foreign debt. Since domestic firms do not internalize their effect on the government's action, the level of foreign borrowing may be suboptimal. Broner and Ventura (2008a,b) analyse a welfare-maximizing government that takes a decision whether to enforce contracts where the party receiving payment can be either a foreign or a domestic resident, assuming that it is impossible to discriminate between the two. The government's decision is then determined by the following trade-off. Not enforcing payments can benefit the average domestic agent by expropriating the foreigners, but it can also hurt him by eliminating domestic transfers. That might undermine ex ante risk sharing or investment efficiency; see Broner and Ventura (2008a,b), respectively. Like Kremer and Mehta (2000), who also use the nondiscrimination assumption, they conclude that globalization may reduce domestic welfare by increasing foreign holdings, which in turn increase the incentive for a government not to enforce payments.

Broner, F. and Ventura, J. (2008a), “Globalization and Risk Sharing” (unpublished manuscript, Universitat Pompeu Fabra).

Broner, F. and Ventura, J. (2008b), “Rethinking the Effects of Financial Liberalization” (unpublished manuscript, Universitat Pompeu Fabra).

Tirole, J. (2003), “Inefficient Foreign Borrowing: A Dual and Common Agency Perspective”, American Economic Review, 93, 1678–1702.

Journal Article.  0 words. 

Subjects: Economics

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