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Sovereign Theft: Theory and Evidence About Sovereign Default and Expropriation

This paper examines two major risks to foreign investors: default on sovereign debt and expropriation of foreign direct investment, which we refer to collectively as “sovereign theft.” Using a series of formal models, we analyze how the incentives to engage in sovereign theft vary with the state of the economy, the risk aversion of political leaders, and the nature of punishments for default and expropriation. We then document patterns of sovereign theft and foreign investment across much of the twentieth century. Our research, based on a new data set, reveals a striking asynchronicity: defaults and expropriations have occurred in alternating, rather than coincident, waves. Our findings shed new light on the possibility of reputational spillovers across issues, and on sources of cooperation and conflict in the international economy.

400wp.pdf (625.47 KB)
Michael Tomz
Mark L.J. Wright
Publication Date
September, 2009