Sovereign debt discounts and the unwillingness to pay.

Many studies show relationships between sovereign debt discounts and various structural, financial and other economic and qualitative phenomena. Although many of them explicitly mention the importance of the willingness to pay, they typically exclude it from the testing because the variable itself is not directly observable. In this paper we model the willingness to pay as an American style option and develop a methodology for an empirical estimation of its value. We then test the significance and explanatory value of this variable from 1986-1994 for 21 countries when standing alone and when combined with the other explanatory variables mentioned in the literature. We find the unwillingness to pay variable is highly significant when standing alone and when combined with the other variables. We also find a strong and significant AR(1) effect, a significant region effect for Latin America and a strong country specific effect for all the countries in our study. The unwillingness variable retains its significance in the presence of these effects.