Code for "Insufficient or Excessive Investment Under Sovereign Default Risk" JIE 2026

Replication package for "Insufficient or Excessive Investment Under Sovereign Default Risk",
Conditionally accepted at the Journal of International Economics

Abstract: Private agents do not internalize the impact of their investment decisions on the sovereign’s bond prices and default risk. Therefore, a standard externality argument implies that investment is insufficient and that a subsidy can improve welfare, if financed by non-distortionary means. We contrast this logic with a countervailing force. When the sovereign is impatient relative to households, plausibly due to political economy factors, it finds laissez-faire capital accumulation excessive and might prefer instead to tax it. We embed both mechanisms in a sovereign default model with decentralized capital investment, long-term public debt, and stochastic trend growth, calibrated to salient features of the Spanish economy. We find that the impatience channel dominates quantitatively, to such an extent that laissez-faire is preferable to the government’s ideal fiscal policy, based on households’ welfare.