Credit ratings failures and policy options
In: Economic policy, Band 25, Heft 62, S. 401-431
ISSN: 1468-0327
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In: Economic policy, Band 25, Heft 62, S. 401-431
ISSN: 1468-0327
Entry requires external finance, especially for less wealthy entrepreneurs, so poor investor protection limits competition. We model how incumbents lobby harder to block access to finance to entrants when politicians are less accountable to voters. In a broad cross-section of countries and industries, we find that (i) entry rates and the total number of producers are positively correlated with investor protection in financially dependent sectors and (ii) countries with more accountable political institutions have better investor protection and lower entry costs. We also find that investor protection is more critical to entry than financial market development. We measure political accountability as access to information. Newspaper readership has much more explanatory power than formal measures of democracies. The effect of diffusion of the press is not due to differences in education or in state ownership of the press. Thus newspaper readership appears to proxy for the degree of informed private scrutiny on political decisions.
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We develop a model of endogenous lobby formation in which wealth inequalityand political accountability undermine entry and financial development. In-cumbents seek a low level of effective investor protection to prevent potentialentrants from raising capital. They succeed because they can promise largerpolitical contributions than the entrants due to the higher rents earned withless competition. Entry and investor protection improve when wealth distribu-tion becomes less unequal, and the political system becomes more accountable.Consistent with these predictions, in a cross-section of 38 countries we find that greater accountability is associated with higher entry in sectors that are more dependent on external capital and have greater growth opportunities. Also,higher accountability and lower income inequality are associated with more ef-fective legal enforcement, even after controlling for legal origin and per-capita income.
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In: Oxford review of economic policy, Band 17, Heft 4, S. 502-519
ISSN: 0266-903X
World Affairs Online
In: Financial Analysts Journal, 2024, 80(2): 52-73.
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Working paper
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Working paper
In: American economic review, Band 95, Heft 4, S. 1005-1030
ISSN: 1944-7981
We analyze the political determinants of investor and employment protection. Our model predicts that proportional electoral systems are conducive to weaker investor protection and stronger employment protection than majoritarian systems. This prediction is consistent with international panel data evidence. The proportionality of the voting system is significantly and negatively correlated with shareholder protection in a panel of 45 countries, and positively correlated with employment protection in a panel of 21 OECD countries. Other political variables also affect regulatory outcomes, especially for the labor market. The origin of the legal system has some additional explanatory power only for employment protection.
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In: Journal of Financial and Quantitative Analysis, forthcoming
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Working paper
In: NBER Working Paper No. w18891
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Working paper
In: Forthcoming Review of Financial Studies
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