Description
Abstract: This paper studies debt and default dynamics under alternative disclosure arrangements in a sovereign default model. The government can access both observable and hidden debt. We show that when debt is not fully disclosed, the government does not internalize the full effects of hidden debt choices on bond prices, thereby reducing the cost of holding hidden debt. We find that switching to a full disclosure regime shifts the portfolio from hidden to observable debt, exacerbating the debt dilution problem. Thus, contrary to conventional wisdom, this switch generates welfare losses.