Qian, Rong2012-03-192012-03-192012-03-01https://hdl.handle.net/10986/3282This paper examines how a country's weak institutions and polarized government can affect the likelihood of its default on sovereign debt. Using a data set of 90 countries, it shows that strong institutions are associated with fewer sovereign default crises. In addition, when institutions are weak, a more polarized government tends to default more often. To explain these findings, the author develops a model showing the dynamics between the quality of institutions, the level of government polarization and sovereign default risk. Countries default more often when they lack rules and strong institutions to curb the influence of powerful groups on government policies. That is because in a polarized government, each powerful group makes decisions without considering the impact on other groups. Simulations of the model show that more than half the cross-country variation in sovereign default frequencies can be explained by institutional quality and the degree of government polarization observed in the data.CC BY 3.0 IGOACCESS TO CREDITADVANCED ECONOMIESAGGREGATE COSTAGGREGATE DEBTAMOUNT OF DEBTARREARSASSETSAVERAGE DEBTBAILOUTSBANK POLICYBANKING CRISESBARGAINING POWERBARGAINING POWERSBONDBOND PRICEBOND PRICESBORROWERBORROWING COUNTRYBUDGET CONSTRAINTBUDGET CONSTRAINTSBUREAUCRATIC QUALITYBUSINESS CYCLECAPITAL FLOWSCAPITAL MARKETCASE OF DEFAULTCENTRAL BANKCENTRAL BANK INDEPENDENCECLAIMCONSUMPTION SMOOTHINGCORRUPTIONCOST STRUCTURECOUNTRY RISKCREDIBILITYCREDIT MARKETCREDITORSCURRENT ACCOUNTDEBT CONTRACTSDEBT CRISESDEBT CRISISDEBT LEVELDEBT OBLIGATIONSDEBT POLICIESDEBT POLICYDEBT REPAYMENTDEBTSDEFAULT COSTDEFAULT COSTSDEFAULT LOSSDEFAULT PENALTYDEFAULT PROBABILITIESDEFAULT PROBABILITYDEFAULT RISKDEFAULTERDEFAULTERSDEFICITSDEMOCRACIESDEPENDENTDEVELOPING COUNTRIESDEVELOPMENT BANKDEVELOPMENT ECONOMICSDEVELOPMENT POLICYDISCOUNT BONDSDUMMY VARIABLEDURABLEECONOMIC ACTIVITYECONOMIC GROWTHECONOMIC POLICYEMERGING ECONOMIESEMPLOYEREQUILIBRIUMETHNIC GROUPSEVENT OF DEFAULTEXCLUSIONEXPENDITUREEXPENDITURESEXPROPRIATIONEXPROPRIATION RISKEXTERNAL BORROWINGEXTERNAL DEBTEXTERNAL SHOCKSFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL AFFAIRSFINANCIAL CRISESFINANCIAL CRISISFINANCIAL RELATIONSHIPFINANCING COSTFINANCING COSTSFISCAL DECENTRALIZATIONFISCAL DEFICITFISCAL DEFICITSFISCAL DISCIPLINEFISCAL POLICIESFISCAL POLICYFISCAL REFORMSFOREIGN INVESTORSFOREIGN LENDERSFULL REPAYMENTFUNCTIONAL FORMSGDP PER CAPITAGINI COEFFICIENTGLOBAL DEVELOPMENT FINANCEGOVERNANCE INDICATORSGOVERNMENT DEBTGOVERNMENT DEFAULTGOVERNMENT EXPENDITUREGOVERNMENT POLICIESGOVERNMENT SPENDINGHARD BUDGETHIGH DEBTINCOMEINCOME INEQUALITYINCOME LEVELINCOMESINDUSTRIALIZATIONINEFFICIENCYINFLATIONINSTITUTIONAL ARRANGEMENTSINSTITUTIONAL BARRIERSINSTITUTIONAL CONSTRAINTSINSTITUTIONAL ENVIRONMENTINTEREST PAYMENTINTEREST RATESINTERGOVERNMENTAL TRANSFERSINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MARKETINTERNATIONAL CAPITAL MARKETSINTERNATIONAL CREDITINTERNATIONAL DEVELOPMENTINTERNATIONAL ECONOMICSINTERNATIONAL INVESTORSJURISDICTIONSLABOR UNIONSLEGAL FRAMEWORKLENDERLENDERSLEVEL OF DEBTLEVELS OF DEBTLEVYLIQUIDATIONLOCAL GOVERNMENTSLOW-INCOME COUNTRIESMACROECONOMIC POLICIESMACROECONOMICSMARGINAL COSTMARKET FOR BONDSMARKET MECHANISMSMONETARY POLICYNATIONAL INCOMENEGATIVE EXTERNALITIESNEGATIVE EXTERNALITYNEGOTIATIONSOPEN ECONOMYOPTIMIZATIONORIGINAL CONTRACTORIGINAL OBLIGATIONOUTPUTOUTPUT LOSSPARTICULAR COUNTRYPOLITICAL ECONOMYPOLITICAL REGIMEPOLITICAL SYSTEMPROBABILITY OF DEFAULTPROPERTY RIGHTSPUBLIC DEBTPUBLIC DEFICITPUBLIC SPENDINGREAL GDPREAL INTERESTREAL INTEREST RATERECESSIONSREGRESSION ANALYSISREMEDIESRENEGOTIATIONRENEGOTIATION PROCESSREPAYMENTREPUDIATIONREPUTATIONRESTRUCTURING OF DEBTRISK AVERSIONRISK NEUTRALRISK OF DEFAULTRISK PREMIUMRULE OF LAWSINGLE DEBTSOCIAL SECURITYSOFT BUDGET CONSTRAINTSSOURCE OF INCOMESOVEREIGN BONDSSOVEREIGN DEBTSOVEREIGN DEFAULTSOVEREIGN DEFAULTSSTATE ARREARSSTATE DEBTSTATE DEBTSSYSTEMIC BANKING CRISESTAXTAX BURDENTAX REVENUETAX REVENUESTOTAL DEBTTREASURYUNDERESTIMATESUTILITY FUNCTIONVOLATILITIESVOLATILITYVOTERSWORLD DEVELOPMENT INDICATORWorld Bank10.1596/1813-9450-5993