Working Paper: CEPR ID: DP6420
Authors: Marc Flandreau; Juan H. Flores
Abstract: How does sovereign debt emerge and become sustainable? This paper provides a new answer to this unsolved puzzle. Focusing on the early 19th century, we argue that intermediaries' market power served to overcome information asymmetries and sustained the development of sovereign debt. Relying on insights from corporate finance, we argue that capitalists turned to intermediaries' reputations to guide their investment strategies. The outcome was a two-tier global bond market, which was sustained by hierarchical relations among intermediaries. This novel theoretical perspective is backed by new archival evidence and empirical data that have never been gathered so far.
Keywords: contagion; intermediaries; IPO
JEL Codes: G15; G23; N23; N26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intermediaries' market power (D40) | overcoming information asymmetries (D82) |
| reputations of intermediaries (L14) | informed decisions by investors (G11) |
| intermediaries (L14) | access to funds for borrowers (G21) |
| hierarchical structure (L22) | concentration of power among intermediaries (D30) |
| concentration of power among intermediaries (D30) | shaping dynamics of global bond market (G15) |
| lack of information about sovereign borrowers (F34) | reliance on intermediaries' reputations (L14) |
| intermediaries' reputations (L14) | market stability (D53) |
| dynamics of intermediaries (L14) | likelihood of defaults among lesser-known borrowers (G33) |
| intermediaries' reputations (L14) | stratification of bond market (G12) |