"Incentive-Compatible Sovereign Debt"

Abstract
In a model of sovereign borrowing and lending–a model with asymmetric information, costly state disclosure, and no outside enforcement–I
show that the sovereign borrower optimally issues a simple type of debt contract.

The result can be seen as the equivalent for sovereign finance of classic debt optimality results by Townsend (1979) and Gale and Hellwig (1985); it
explains why sovereign borrowers issue plain bonds instead of richer debt contracts: plain bonds economize on the political cost of state disclosure. An increase in the cost of state disclosure can increase welfare through a commitment effect: higher state disclosure costs commit the sovereign to repay her debt at face value in more states of the world; thus, reducing the likelihood of default.