Renegotiation After Sovereign Default: Bygones No Longer, with Ling Feng (R&R)
In the aftermath of a sovereign default, debt recovery is determined through a restructuring process. This recovery is important for both the country and the creditors. For the country, debt recovery determines its debt burden after exiting default and impacts macroeconomic performance. For the creditors, recovery reduces their losses. Using the dataset of Cruces and Trebesch (2013), I show that the level of recovery is positively related with the level of defaulted debt. In light of this finding, I build a framework that rationalizes this strong association by employing the Kalai-Smorodinsky bargaining solution as a model of sovereign debt renegotiation, while jointly matching standard emerging markets' behavior. I identify the key assumptions that enable the model to match the data. I also show that the standard model using Nash bargaining protocol results in debt recovery being unrelated to the outstanding level of debt. A debt relief program is then studied to highlight the difference between the two models in welfare implications.
This paper studies how fiscal rules affect inequality and efficiency in a political economy model of legislative bargaining. We show that fiscal rules sharpen the trade-off between equity and efficiency: while they reduce inequality, they do so at the cost of greater inefficiency. This result does not arise because fiscal rules mechanically limit discretion, but because they interact with the strategic environment that governs fiscal policymaking. In our model, two parties bargain over private transfers, public goods, and debt, with private transfers embedded as an endogenous status quo. Fiscal rules restrict allocations and, through the status quo, reshape future bargaining positions. This generates intra- and intertemporal distortions, amplifying inefficiency even as inequality falls. In contrast, under a benchmark alternating dictators framework, fiscal rules can improve both equity and efficiency by directly curbing opportunism without creating additional distortions. These findings highlight the importance of embedding fiscal constraints within a dynamic political economy framework when evaluating their welfare implications.
Political Bargaining and Government Debt, with Laura Karpuska (submitted) [online appendix]
This paper develops a political bargaining model of government debt. Current allocations are partially mapped into an endogenous status quo that determines future reservation utilities. We show that bargaining increases equilibrium debt relative to power-alternation models. Even under unanimity, bargaining distortions persist and debt remains positive. We characterize when political equilibria feature debt: it arises only when parties are not fully insured against expropriation resulting from political turnover. Tightening debt limits reduces private transfers, highlighting interaction between debt and entitlements through the political-bargaining channel. As a result, fiscal rules that restrict multiple instruments may make political agreement harder to sustain.
Import Competition and Credit Reallocation: Evidence from China’s WTO Accession, with Ling Feng, Zhiyuan Li, Xiaoyi Liu and Fan Yuan.
Fiscal Rules, Inequality and Polarization: Empirical Evidence, with Pâmela Borges and Laura Karpuska.
The Wealthy Hand-to-Mouth and Property Tax Reform in China.
Debt Arrears and Delay in Sovereign Default Renegotiation.