Dissertation
The Political Economy of Sovereign Debt: Domestic Politics, Strategic Choices, and Suboptimal Outcomes
Committee: Evelyne Huber (co-chair), Layna Mosley (co-chair), Thomas Oatley, Georg Vanberg, and Patrick Conway (Economics)
Summary: I explore the political dimension of developing countries' foreign debt problems, one of the key issues in international political economy. I address the issue by examining three sovereign debt problems that have been salient over the past few decades: sovereign default, confidence crisis, and overborrowing. From the political economy perspective, I highlight the interplay between domestic politics and strategic actions at the international level and, using game-theoretic models, seek to explain why such suboptimal outcomes as defaults on debt, sudden stops of debt rollover, and excessive debt accumulation arise. To test empirical implications of the models, I make innovative use of various methods tools from modeling strategic selection, to measuring unobservable latent traits such as transparency, to utilizing quantile regression techniques to explore behaviors at the tails of a distribution.
Chapter 1: Inequality and Sovereign Default under Democracy: Empirical Implications from Modeling Strategic Selection
Summary: I examine the political determinants of sovereign default. I argue that sovereign default involves an intertemporal tradeoff between an immediate consumption boost and a future tax increase. Since a poorer voter internalizes less of the future cost of default, the majority's demand for default increases as the median is poorer. Therefore, greater income inequality implies a higher default risk. I then present a signaling game that models the strategic selection that a sovereign must go through to get to the default decision node. I show that sovereign default is most likely to actually occur when the level of income inequality is intermediate. The intuition is that sovereign default occurs when risky sovereigns successfully induce creditors to provide a loan, but the most risky ones are among those least able to do so. Empirical analysis of the incidence of sovereign default as well as of the frequency of no access to credit markets provides strong support for the claim. The manuscript is in the revise and resubmit phase at The Journal of Politics.
Chapter 2: Democracy, Transparency, and the Confidence Crisis in the International Credit Markets
Summary: Chapter 2 of the dissertation, drawing upon a recent development in models of self-fulfilling currency attacks, explores the impacts of political institutions on the likelihood of a sudden stop of loan rollover. I show that more democratic governments are more transparent, and the accurate public information that they provide about the economy helps reduce individual creditors' uncertainty about each others' beliefs. Therefore, unless the economy is expected to be very bad, more democratic countries are less likely to suffer a sudden stop of bond inflows. When the expected economic situation is dismal, however, being more transparent, democracy can have a detrimental effect, worsening the probability of a confidence crisis. To test the model's predictions, I measure transparency scores from missingness in 51 economic indicators in the World Bank's World Development Indicators using a Bayesian Item Response Theory (IRT) model in which each indicator's missing or non-missing status is statistically modeled as a manifestation of the underlying, latent trait of a country, i.e., data transparency. The manuscript is currently under review at The American Journal of Political Science. For its detailed summary, see its slide
version.Chapter 3: Regime Type and Heavy Indebtedness
Summary: I seek to resolve incongruence between theoretical models and empirical tests on foreign debt accumulation. While theory suggests that electoral accountability and checks and balances constrain democratic leaders from borrowing too much foreign debt at the expense of future consumption, empirical evidence is few and far between. Another line of theory emphasizes time horizon as an important underlying factor in explaining variations in the level of foreign debt, a factor that accounts for unobserved heterogeneity within regime types and might explain why empirical support for the regime-type hypothesis is so weak. I use quantile regressions to capture cross-regime-type differences among those with similar, unexplained levels of foreign debt. I find that overborrowing democracies, or democracies borrowing more than expected due to such factors as short time horizon, accumulate significantly less debt than overborrowing autocracies, suggesting that regime type matters most with regard to the difference in heavy, rather than average, indebtedness. I presented the chapter's preliminary findings as a poster with emphasis on methodological issues at the 2008 Summer Conference of the Society for Political Methodology.