Sovereign Defaults and Democracy

This paper examines the effect of state default on political regime and shows that state defaults are associated with autocratic polity changes. Using a dataset of 105 countries from 1824 to 2004, we find that a state default leads to a statistically significant decline in the level of democracy, as measured by the Polity IV index. To deal with endogeneity, we use an instrumental variables fixed effects estimator along with a semiparametric propensity score weighting estimator to correct for democratic dynamics prior to the default.