Debt Default and History
| Author | Kris James Mitchener |
| Position | Associate Professor of Economics Santa Clara University and National Bureau of Economic Research |
| Pages | 50-51 |
Page 50
Sovereign Debt across Three Centuries Princeton University Press, 2007, 328 pp., $22.95 (paper).
Readers interested in gaining a better long-run appreciation of the history of sovereign debt default are sure to learn a great deal from Michael Tomz's Reputation and International Cooperation.
The first chapter provides an overview of different ways of thinking about the vexing problems of sovereign debt-why countries default, why some default repeatedly, and what leads debtors to repay. Chapter 2 lays out the basics of what Tomz calls a dynamic reputation model, which, he argues, helps to explain the behavior of both debtors and creditors. In his model, which is largely descriptive rather than mathematical, governments have heterogeneous preferences and types of borrowers are not fully revealed to market participants.
Hence, creditors form beliefs about borrowers, update these beliefs over time, and use a borrower's reputation to discern whether they should lend and at what rate they should lend. He provides a convenient way of describing the reputation of borrowers at a given point in time-as "stalwarts" (those who always pay), "fair-weather" (those who pay in good times but not always in bad times), and "lemons" (those who don't pay in bad times and sometimes default in good times as well)-and uses this classification to understand the predictions of his model versus other models.
The rest of the book carries out a variety of empirical tests using some impressive, new historical data sets to convince readers that the author's dynamic model of reputation fits the data from three centuries of sovereign lending and borrowing. For a book that focuses mostly on the past rather than on the present, it is somewhat surprising that the narrative, at times, lacks historical nuance.
The book paints a picture of history that is stark and always consistent with reputational theory. as a result, it sometimes ignores or understates the importance of historical evidence and data that don't fit the model's predictions and perhaps better fit other models.
These weaknesses are most visible in Chapter 6. Tomz argues that government interventions on behalf of creditors were rare during 1820-1913 and thus not important for regulating debt default. First, he only considers militarized interventions. Turkey (Ottoman empire), Greece, egypt, Tunis, Serbia, and...
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