We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy and seeks to insure a risk averse domestic constituency. The expected tax on capital is shown to vary with the state of the economy,...

The paper presents a model of sovereign debt repayment based in a tragedy of the commons. It is shown that sovereign debt is issued and repaid in equilibrium, even when contracts a la Bulow-Rogoff are available to a country that defaults.

imbalance.