Intergenerational conflict and international risk sharing

Abstract

Existing models of foreign debt and insurance capacityas sume that the costs and benefits of default are evenlydistributed across agents in the defaulting country. To studyho w tensions among different groups inside a countryaffect its sovereign risk management I consider an economyw hose agents differ in their life spans. This makes the cost and benefits of default to be different across generations. The countryis able to come up with a positive level of insurance bylink ing intergenerational transfers to the default decision of its citizens. This results is found both for the case of a Ramseyplanner who cares for all present and future generations, and when decisions are taken by majorityv ote among living generations.