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Why Do Some Countries Default More Often than Others? The Role of Institutions


Rong Qian


World Bank

March 1, 2012

World Bank Policy Research Working Paper No. 5993

Abstract:     
This 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.

Number of Pages in PDF File: 55

Keywords: Debt Markets, Bankruptcy and Resolution of Financial Distress, Economic Theory & Research, Access to Finance, Emerging Markets

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Date posted: March 13, 2012  

Suggested Citation

Qian, Rong, Why Do Some Countries Default More Often than Others? The Role of Institutions (March 1, 2012). World Bank Policy Research Working Paper No. 5993. Available at SSRN: http://ssrn.com/abstract=2020865

Contact Information

Rong Qian (Contact Author)
World Bank ( email )
1818 H Street, NW
Washington, DC 20433
United States
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