Open Economies Review

, Volume 16, Issue 1, pp 77–99 | Cite as

Crony Capitalism and Sovereign Default

  • Victor Vaugirard


Cronyism provides policymakers with marked incentives to repay sovereign debt. This takes place at the expense of the average citizen who bears both steep costs of debt repudiation and high costs of debt service, as clientelism increases both financial fragility and the debt burden. The paper sets up a model of strategic debt default that nails down this point, with political distortions and where a representative agent can dismiss the government and overrule its decision. Economic hard times provide an opportunity to implement reforms fighting clientelism, as the implicit coalition between groups of cronies may break down. A model is built along these lines, which highlights cross-country contagion of debt repudiation.


crony capitalism political distortion debt service financial fragility pure contagion 


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Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.TEAM-CNRS & CREFIBUniversity of Paris-1ParisFrance

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