Networked Default: Public Debt, Trade Embeddedness, and Partisan Survival in Democracies Since 1870

Abstract

Sovereign default is often associated with the downfall of incumbent governments in democracies. Whilst existing scholarship focuses on the relationship between default and domestic politics and institutions, here we look to the broader international environment wherein repayment and default take place. We find that the impact of sovereign default on the survival of incumbent political parties is mediated by the prevalence of default amongst those peers in a country’s local network of international trade. We argue that this effect derives from the heuristic value of networks, the rarity of default and the vividness of its perceived costs to voters. Voters perceive such foreign defaults as highlighting their costliness and thus become more inclined to punish incumbent regimes who fail to repay. This result is inconsistent with an alternative possibility — that networked default might contribute to the decay of a repayment norm and thus provide a justifiable “excuse” for default at home. Overall, our findings point to the political interdependence of repayment and default choices and the need for political scientists to take greater account of network effects in analyzing the consequences of economic misbehavior.

Keywords: Sovereign Default, Debt Crises, Political Survival, Networks, Voter Behavior

JEL Classification: D72, F34, H63, P16