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Loss Aversion in Politics
(with A. Alesina)
NBER WP No 21077We study how loss aversion affects the political equilibrium in a simple majority voting model. First, we show a status quo bias, which leads to path dependence. Second, loss aversion implies a moderating effect on the most extreme voters. Third, in a dynamic setting, the effect of loss aversion diminishes with the length of the planning horizon of voters; however, in the presence of a projection bias, majorities are partially unable to understand how fast they will adapt to a new policy. This makes changes less likely and induces time inconsistency: policy changes are timid at the beginning, while in later periods they are made progressively more radical. Fourth, in a stochastic environment, loss aversion yields a significant distaste for risk, but also a smaller attachment to the status quo. The application of these results to a model of redistribution leads to empirically plausible implications.
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Sanctions and Incentives to Repudiate External Debt
(with C. de Bassa Scheresberg and E. Grillo)
Carlo Alberto Notebooks, no. 505, 2017
We study, theoretically and empirically, how international sanctions shape a governmentís incentives to default on foreign debt. The International Community levies a sanction in the attempt to foment discontent with the government. A default on foreign debt frees resources that the government can use to buy political support. It then becomes a defensive strategy aimed at regaining political stability. Data covering the period 1950-2005 reveal that sanctions provide an almost 2 percentage point increase in default probability one year later. An external debt crisis that occurs after a country has been hit by a sanction is positively associated with a sizeable increase in the level of political stability. This paper suggests that a certain degree of caution is necessary in the use of sanctions, especially when the targeted country is highly indebted.
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Bank Bailouts and Redistributive Monetary Policies: a political economics approach
(with D. Masciandaro)
Baffi Centre Working Paper Series
Since the outset of the Financial Crisis, Central Banks have been widely supporting the governments effort to rescue troubled banks. Their support often consisted in generous monetization policies. This paper studies the efficient level of such policies. It also argues that often these policies yield large redistributive effects, which in turn fuel political conflict within society. High political pressure on Central Banks lowers their independence, leading to excessive bailout and monetization levels. This kind of political distortion is more likely to occur when troubled banks are big and their ownership is widespread. This in turn strengthens the incentive for big banks to engage in moral hazard.
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