This paper analyzes the interplay between corporate transparency, stock market trading, and produ... more This paper analyzes the interplay between corporate transparency, stock market trading, and product market competition. Dominant investors can in ‡uence information collection in the …nancial market, and thereby corporate transparency, by a¤ecting market liquidity or the cost of information collection. In line with results from Industrial Organization, transparency results in higher variability of pro…ts and output. Thus lenders prefer less information revelation through stock market trading, since this protects …rms when in a weak competitive position, while equity holders prefer more to make full use of the strategic advantage of a strong …rm. We show that bank-controlled …rms will tend to discourage trading to reduce price informativeness, while shareholder-run …rms prefer more transparency. Our comparative statics show that bank control may fail to keep …rms less transparent as global trading volumes rise.
Some credit booms, though by no means all, result in financial crises. While risk-taking incentiv... more Some credit booms, though by no means all, result in financial crises. While risk-taking incentives seem a plausible cause, market participants do not appear to anticipate increasing risk. We show how credit expansions driven by credit supply shocks may be misunderstood as productivity driven, due to the opacity of bank balance sheets. Large funding shocks may induce some intermediaries to scale up speculative lending, distorting price signals. Other banks and firms may misjudge actual profitability, reinforcing the credit expansion. Similarly, at times of low saving supply credit may be inefficiently low, and speculative assets underpriced.
We analyze the political economy of monetary unification among countries with different quality o... more We analyze the political economy of monetary unification among countries with different quality of institutions. Countries with stronger institutions have lower public spending and better productive incentives, even under a stronger currency. Governments under weaker institutions spend more and must occasionally devalue. In a diverse monetary union prices and flows adjust quickly while institutional differences persist, so the common exchange rate has large redistributive effects. Public spending in the weaker country is less constrained and may rise, so productive incentives are reduced by both a fiscal and common exchange rate effect. A weak country government may agree to a common currency that reduces productive capacity as it enables more public spending. Strong country production benefits from a weaker currency, but in a crisis the survival of the monetary union may require fiscal transfers, justified by the implicit gains. Even when a diverse monetary union is on aggregate beneficial to all countries, firms in weaker countries and savers in stronger countries lose.
Investor confidence is a major determinant of financial integration for emerging markets and thei... more Investor confidence is a major determinant of financial integration for emerging markets and their stock prices. We investigate whether privatization also has a significant effect on emerging stock market development through the resolution of policy risk. We argue that a sustained privatization program represents a major test of political commitment to market oriented reforms and to safer private property rights. The evidence suggests that progress in privatization gradually leads to increased confidence as measured by perceived policy risk. Moreover, increased confidence has a strong effect on local market development and excess returns. We conclude that, while liberalization is a necessary condition for market development, the resolution of policy risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.
International Journal of Central Banking, Aug 1, 2011
The paper studies risk mitigation associated with capital regulation, in a context where banks ma... more The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended e¤ect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in nontail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.
Journal of International Money and Finance, Feb 1, 2001
This paper investigates whether privatization in emerging economies has a significant indirect ef... more This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test which gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is correlated with improvements in perceived political risk and that these improvements are significantly larger in privatizing countries than in non-privatizing countries, indicating that the resolution of such risk is endogenous to the privatization process. Our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies, suggesting that political risk is a priced factor. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies. Acknowledgements: We thank Frank Sader, Sheridan Titman, and (especially) the referee for useful comments.
This paper reviews the state of thinking on the governance role of public ownership and control. ... more This paper reviews the state of thinking on the governance role of public ownership and control. We argue that the transfer of operational control over productive assets to the private sector represents the most desirable governance, due to the inherent difficulty for citizens to constrain political abuse relative to the ability of governments to regulate private activity. However in weak institutional environments the process needs to be structured so as to avoid capture of the regulatory process. The speed of transfer should be timed on the progress in developing a strong regulatory governance system, to which certain residual rights of intervention must be vested. After all, what are "institutions" if not governance mechanisms with some degree of autonomy from both political and private interests? The gradual creation of institutions partially autonomous from political power must become central to the development of an optimal mode of regulatory governance. We advance some suggestions about creating accountability in regulatory governance, in particular creating an internal control system based on a rotating board representative of users, producers and civil society, to be elected by a process involving frequent reporting and disclosure.
Financial liberalization under weak regulation is often followed by …nancial crises. We argue tha... more Financial liberalization under weak regulation is often followed by …nancial crises. We argue that this may be the deliberate outcome of lobbying interests capturing the reform process. Liberalization may be designed to provide fragile …nancial access to new entrants by limiting investor protection, resulting in …nancial deepening rather than broadening access to capital. Interestingly, lobbying may deliberately worsen …nancial fragility. Poor investor protection limits access to re…nance after a shock, forces ine¢ cient default and exit by more leveraged entrepreneurs, thus protecting more established producers. We provide supporting evidence that industry exit rates and pro…t margins are higher in more corrupt countries during banking crises.
The financial crisis saw local credit losses spread widely because bank capital was insufficient ... more The financial crisis saw local credit losses spread widely because bank capital was insufficient to cope with the accumulated credit risk, maturity mismatch and contingent liquidity risk. Ultimately, short-term liability holders lost faith in some large banks' ability to repay them. The resulting runs forced supervisors to step in with government support. Basel III rules now require higher equity ratios, though banks have been granted a very long time to comply. The financial industry has successfully argued that raising hundreds of billions in capital is at present too difficult.
Financial liberalization under weak regulation is often followed by …nancial crises. We argue tha... more Financial liberalization under weak regulation is often followed by …nancial crises. We argue that this may be the deliberate outcome of lobbying interests capturing the reform process. Liberalization may be designed to provide fragile …nancial access to new entrants by limiting investor protection, resulting in …nancial deepening rather than broadening access to capital. Interestingly, lobbying may deliberately worsen …nancial fragility. Poor investor protection limits access to re…nance after a shock, forces ine¢ cient default and exit by more leveraged entrepreneurs, thus protecting more established producers. We provide supporting evidence that industry exit rates and pro…t margins are higher in more corrupt countries during banking crises.
A series of amendments to US and EU bankruptcy laws created in 2002 - 2005 unique bankruptcy priv... more A series of amendments to US and EU bankruptcy laws created in 2002 - 2005 unique bankruptcy privileges for secured financial credit and derivatives. This major legal change, though poorly understood, created super priority rights for some investors. It fed the final and most damaging stage of the securitisation wave, funded heavily with repos and hedged by CDS derivatives. Bankruptcy exceptions stride with principles of bankruptcy law aimed at orderly resolution of distress. They exempt all credit collateralized with securities and any derivative, listed or not, from the automatic stay in bankruptcy, and exempted them from rules on cross-default clauses. As a result, these investors can front run all other in case of default, as they did spectacularly upon Lehmann Brothers’ default. Ultimately, this super priority construction shifts risk to other parties and to the financial system. We propose here to target the very short-term risk by taxing the so-called bankruptcy privileges. T...
Ente di afferenza: () Copyright c by Società editrice il Mulino, Bologna. Tutti i diritti sono ri... more Ente di afferenza: () Copyright c by Società editrice il Mulino, Bologna. Tutti i diritti sono riservati. Per altre informazioni si veda https://www.rivisteweb.it Licenza d'uso L'articoloè messo a disposizione dell'utente in licenza per uso esclusivamente privato e personale, senza scopo di lucro e senza fini direttamente o indirettamente commerciali. Salvo quanto espressamente previsto dalla licenza d'uso Rivisteweb,è fatto divieto di riprodurre, trasmettere, distribuire o altrimenti utilizzare l'articolo, per qualsiasi scopo o fine. Tutti i diritti sono riservati.
Can a wealth shift to emerging countries explain instability in developed countries? Investors ex... more Can a wealth shift to emerging countries explain instability in developed countries? Investors exposed to political risk seek safety in countries with better property right protection. This induces private intermediaries to offer safety via inexpensive demandable debt, and increases lending into marginal projects. Because safety conscious foreigners escape any risk by running also in some good states, cheap foreign funding leads to larger and more frequent runs. Beyond some scale, foreign runs also induce domestic runs in order to avoid dilution. When excess liquidation causes social losses, a domestic planner may limit the scale of foreign inflows or credit volume.
Politicians in ‡uence the allocation of …nance either directly via state banks, or indirectly via... more Politicians in ‡uence the allocation of …nance either directly via state banks, or indirectly via private banks using banking regulation or creditor rights. With state ownership of banks, entrepreneurs may form coalitions to bribe politicians to obtain scarce loans. With private ownership of banks, interest groups may lobby to in ‡uence creditor rights to limit access to less established …rms. When public accountability and judicial independence are low, politicians prefer state ownership of banks. Politicians can extract more rents from competing coalitions when having direct control. The reason is that regulation only allows politicians to target certain types of entrepreneurs while direct control enables them to separate individual entrepreneurs. Beyond a certain threshold of public accountability and judicial independence legal risks from bribing become too high and it becomes politically optimal to to shift to lobbying on regulation by privatising banks. Access to …nance and entry increase with public accountability and tends to be greater under private ownership of banks. We also consider bribing to allow non-repayment of state bank loans, and discuss the intermediate case of private banks lending only to their owners.
This Discussion Paper is issued under the auspices of the Centre's research programme in FINANCIA... more This Discussion Paper is issued under the auspices of the Centre's research programme in FINANCIAL ECONOMICS. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, but the Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as an educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and nonpartisan, bringing economic research to bear on the analysis of medium-and long-run policy questions. These Discussion Papers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character.
In a transition economy, enterprise restructuring may exhibit a Laffer-curve response to tighter ... more In a transition economy, enterprise restructuring may exhibit a Laffer-curve response to tighter credit as a result of rational collective inertia. In the presence of a rigid production structure, unenforceable contracts and high adjustment costs, a contraction in credit finance subtracts more liquidity than enterprises can generate internally. Because unrestructured firms are forced to extend trade credit to illiquid buyers, an increase in their number increases the availability of forced supplier credit, in turn increasing the attractiveness of inertial behavior. As trade credit cannot be enforced, a critical mass of trade and wage arrears causes pressure for a collective bailout, thus validating inertial behavior even by reformable firms.
Systemic banking crises often result from widespread imprudent lending, driven by strong incentiv... more Systemic banking crises often result from widespread imprudent lending, driven by strong incentives for risk taking and connected lending. This paper identi…es a counterbalancing incentive for individual banks to act prudently in the face of widespread risk taking among its competitors. In general, the value of a banking charter is enhanced by reduced competition. Hence a deliberate policy of promoting takeovers of weaker institutions by solvent banks has the e¤ect of increasing the charter value of solvent banks, and grants the managers of better banks an incentive to pursue less pro…table but safer lending strategies, thus breaking down the strategic externality of risktaking strategies. A temporary phase of concentration in banking can thus reinforce stability and pre-emptive closures may in fact reduce the risk of a systemic banking crisis. We also address the case where banking authorities face pressure for an ex post bailout in a context where many banks are in trouble at the same time.
This survey reviews the literature on the political economy of financial structure, broadly defin... more This survey reviews the literature on the political economy of financial structure, broadly defined to include the size of capital markets and banking systems as well as the distribution of access to external finance across firms. The theoretical literature on the institutional basis for financial development and the recent evidence suggests that unconstrained political power undermines financial accumulation. Even under limited government, unaccountable institutions lead to regulatory capture, favor connected interests, and undermine finance access and entry. Thus the degree of access to political rights by citizens thus strongly affects their access to finance. Finally, we review the recent literature on the time variation of financial development across democracies during the XX century.
This paper analyzes the interplay between corporate transparency, stock market trading, and produ... more This paper analyzes the interplay between corporate transparency, stock market trading, and product market competition. Dominant investors can in ‡uence information collection in the …nancial market, and thereby corporate transparency, by a¤ecting market liquidity or the cost of information collection. In line with results from Industrial Organization, transparency results in higher variability of pro…ts and output. Thus lenders prefer less information revelation through stock market trading, since this protects …rms when in a weak competitive position, while equity holders prefer more to make full use of the strategic advantage of a strong …rm. We show that bank-controlled …rms will tend to discourage trading to reduce price informativeness, while shareholder-run …rms prefer more transparency. Our comparative statics show that bank control may fail to keep …rms less transparent as global trading volumes rise.
Some credit booms, though by no means all, result in financial crises. While risk-taking incentiv... more Some credit booms, though by no means all, result in financial crises. While risk-taking incentives seem a plausible cause, market participants do not appear to anticipate increasing risk. We show how credit expansions driven by credit supply shocks may be misunderstood as productivity driven, due to the opacity of bank balance sheets. Large funding shocks may induce some intermediaries to scale up speculative lending, distorting price signals. Other banks and firms may misjudge actual profitability, reinforcing the credit expansion. Similarly, at times of low saving supply credit may be inefficiently low, and speculative assets underpriced.
We analyze the political economy of monetary unification among countries with different quality o... more We analyze the political economy of monetary unification among countries with different quality of institutions. Countries with stronger institutions have lower public spending and better productive incentives, even under a stronger currency. Governments under weaker institutions spend more and must occasionally devalue. In a diverse monetary union prices and flows adjust quickly while institutional differences persist, so the common exchange rate has large redistributive effects. Public spending in the weaker country is less constrained and may rise, so productive incentives are reduced by both a fiscal and common exchange rate effect. A weak country government may agree to a common currency that reduces productive capacity as it enables more public spending. Strong country production benefits from a weaker currency, but in a crisis the survival of the monetary union may require fiscal transfers, justified by the implicit gains. Even when a diverse monetary union is on aggregate beneficial to all countries, firms in weaker countries and savers in stronger countries lose.
Investor confidence is a major determinant of financial integration for emerging markets and thei... more Investor confidence is a major determinant of financial integration for emerging markets and their stock prices. We investigate whether privatization also has a significant effect on emerging stock market development through the resolution of policy risk. We argue that a sustained privatization program represents a major test of political commitment to market oriented reforms and to safer private property rights. The evidence suggests that progress in privatization gradually leads to increased confidence as measured by perceived policy risk. Moreover, increased confidence has a strong effect on local market development and excess returns. We conclude that, while liberalization is a necessary condition for market development, the resolution of policy risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.
International Journal of Central Banking, Aug 1, 2011
The paper studies risk mitigation associated with capital regulation, in a context where banks ma... more The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended e¤ect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in nontail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.
Journal of International Money and Finance, Feb 1, 2001
This paper investigates whether privatization in emerging economies has a significant indirect ef... more This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test which gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is correlated with improvements in perceived political risk and that these improvements are significantly larger in privatizing countries than in non-privatizing countries, indicating that the resolution of such risk is endogenous to the privatization process. Our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies, suggesting that political risk is a priced factor. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies. Acknowledgements: We thank Frank Sader, Sheridan Titman, and (especially) the referee for useful comments.
This paper reviews the state of thinking on the governance role of public ownership and control. ... more This paper reviews the state of thinking on the governance role of public ownership and control. We argue that the transfer of operational control over productive assets to the private sector represents the most desirable governance, due to the inherent difficulty for citizens to constrain political abuse relative to the ability of governments to regulate private activity. However in weak institutional environments the process needs to be structured so as to avoid capture of the regulatory process. The speed of transfer should be timed on the progress in developing a strong regulatory governance system, to which certain residual rights of intervention must be vested. After all, what are "institutions" if not governance mechanisms with some degree of autonomy from both political and private interests? The gradual creation of institutions partially autonomous from political power must become central to the development of an optimal mode of regulatory governance. We advance some suggestions about creating accountability in regulatory governance, in particular creating an internal control system based on a rotating board representative of users, producers and civil society, to be elected by a process involving frequent reporting and disclosure.
Financial liberalization under weak regulation is often followed by …nancial crises. We argue tha... more Financial liberalization under weak regulation is often followed by …nancial crises. We argue that this may be the deliberate outcome of lobbying interests capturing the reform process. Liberalization may be designed to provide fragile …nancial access to new entrants by limiting investor protection, resulting in …nancial deepening rather than broadening access to capital. Interestingly, lobbying may deliberately worsen …nancial fragility. Poor investor protection limits access to re…nance after a shock, forces ine¢ cient default and exit by more leveraged entrepreneurs, thus protecting more established producers. We provide supporting evidence that industry exit rates and pro…t margins are higher in more corrupt countries during banking crises.
The financial crisis saw local credit losses spread widely because bank capital was insufficient ... more The financial crisis saw local credit losses spread widely because bank capital was insufficient to cope with the accumulated credit risk, maturity mismatch and contingent liquidity risk. Ultimately, short-term liability holders lost faith in some large banks' ability to repay them. The resulting runs forced supervisors to step in with government support. Basel III rules now require higher equity ratios, though banks have been granted a very long time to comply. The financial industry has successfully argued that raising hundreds of billions in capital is at present too difficult.
Financial liberalization under weak regulation is often followed by …nancial crises. We argue tha... more Financial liberalization under weak regulation is often followed by …nancial crises. We argue that this may be the deliberate outcome of lobbying interests capturing the reform process. Liberalization may be designed to provide fragile …nancial access to new entrants by limiting investor protection, resulting in …nancial deepening rather than broadening access to capital. Interestingly, lobbying may deliberately worsen …nancial fragility. Poor investor protection limits access to re…nance after a shock, forces ine¢ cient default and exit by more leveraged entrepreneurs, thus protecting more established producers. We provide supporting evidence that industry exit rates and pro…t margins are higher in more corrupt countries during banking crises.
A series of amendments to US and EU bankruptcy laws created in 2002 - 2005 unique bankruptcy priv... more A series of amendments to US and EU bankruptcy laws created in 2002 - 2005 unique bankruptcy privileges for secured financial credit and derivatives. This major legal change, though poorly understood, created super priority rights for some investors. It fed the final and most damaging stage of the securitisation wave, funded heavily with repos and hedged by CDS derivatives. Bankruptcy exceptions stride with principles of bankruptcy law aimed at orderly resolution of distress. They exempt all credit collateralized with securities and any derivative, listed or not, from the automatic stay in bankruptcy, and exempted them from rules on cross-default clauses. As a result, these investors can front run all other in case of default, as they did spectacularly upon Lehmann Brothers’ default. Ultimately, this super priority construction shifts risk to other parties and to the financial system. We propose here to target the very short-term risk by taxing the so-called bankruptcy privileges. T...
Ente di afferenza: () Copyright c by Società editrice il Mulino, Bologna. Tutti i diritti sono ri... more Ente di afferenza: () Copyright c by Società editrice il Mulino, Bologna. Tutti i diritti sono riservati. Per altre informazioni si veda https://www.rivisteweb.it Licenza d'uso L'articoloè messo a disposizione dell'utente in licenza per uso esclusivamente privato e personale, senza scopo di lucro e senza fini direttamente o indirettamente commerciali. Salvo quanto espressamente previsto dalla licenza d'uso Rivisteweb,è fatto divieto di riprodurre, trasmettere, distribuire o altrimenti utilizzare l'articolo, per qualsiasi scopo o fine. Tutti i diritti sono riservati.
Can a wealth shift to emerging countries explain instability in developed countries? Investors ex... more Can a wealth shift to emerging countries explain instability in developed countries? Investors exposed to political risk seek safety in countries with better property right protection. This induces private intermediaries to offer safety via inexpensive demandable debt, and increases lending into marginal projects. Because safety conscious foreigners escape any risk by running also in some good states, cheap foreign funding leads to larger and more frequent runs. Beyond some scale, foreign runs also induce domestic runs in order to avoid dilution. When excess liquidation causes social losses, a domestic planner may limit the scale of foreign inflows or credit volume.
Politicians in ‡uence the allocation of …nance either directly via state banks, or indirectly via... more Politicians in ‡uence the allocation of …nance either directly via state banks, or indirectly via private banks using banking regulation or creditor rights. With state ownership of banks, entrepreneurs may form coalitions to bribe politicians to obtain scarce loans. With private ownership of banks, interest groups may lobby to in ‡uence creditor rights to limit access to less established …rms. When public accountability and judicial independence are low, politicians prefer state ownership of banks. Politicians can extract more rents from competing coalitions when having direct control. The reason is that regulation only allows politicians to target certain types of entrepreneurs while direct control enables them to separate individual entrepreneurs. Beyond a certain threshold of public accountability and judicial independence legal risks from bribing become too high and it becomes politically optimal to to shift to lobbying on regulation by privatising banks. Access to …nance and entry increase with public accountability and tends to be greater under private ownership of banks. We also consider bribing to allow non-repayment of state bank loans, and discuss the intermediate case of private banks lending only to their owners.
This Discussion Paper is issued under the auspices of the Centre's research programme in FINANCIA... more This Discussion Paper is issued under the auspices of the Centre's research programme in FINANCIAL ECONOMICS. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, but the Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as an educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and nonpartisan, bringing economic research to bear on the analysis of medium-and long-run policy questions. These Discussion Papers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character.
In a transition economy, enterprise restructuring may exhibit a Laffer-curve response to tighter ... more In a transition economy, enterprise restructuring may exhibit a Laffer-curve response to tighter credit as a result of rational collective inertia. In the presence of a rigid production structure, unenforceable contracts and high adjustment costs, a contraction in credit finance subtracts more liquidity than enterprises can generate internally. Because unrestructured firms are forced to extend trade credit to illiquid buyers, an increase in their number increases the availability of forced supplier credit, in turn increasing the attractiveness of inertial behavior. As trade credit cannot be enforced, a critical mass of trade and wage arrears causes pressure for a collective bailout, thus validating inertial behavior even by reformable firms.
Systemic banking crises often result from widespread imprudent lending, driven by strong incentiv... more Systemic banking crises often result from widespread imprudent lending, driven by strong incentives for risk taking and connected lending. This paper identi…es a counterbalancing incentive for individual banks to act prudently in the face of widespread risk taking among its competitors. In general, the value of a banking charter is enhanced by reduced competition. Hence a deliberate policy of promoting takeovers of weaker institutions by solvent banks has the e¤ect of increasing the charter value of solvent banks, and grants the managers of better banks an incentive to pursue less pro…table but safer lending strategies, thus breaking down the strategic externality of risktaking strategies. A temporary phase of concentration in banking can thus reinforce stability and pre-emptive closures may in fact reduce the risk of a systemic banking crisis. We also address the case where banking authorities face pressure for an ex post bailout in a context where many banks are in trouble at the same time.
This survey reviews the literature on the political economy of financial structure, broadly defin... more This survey reviews the literature on the political economy of financial structure, broadly defined to include the size of capital markets and banking systems as well as the distribution of access to external finance across firms. The theoretical literature on the institutional basis for financial development and the recent evidence suggests that unconstrained political power undermines financial accumulation. Even under limited government, unaccountable institutions lead to regulatory capture, favor connected interests, and undermine finance access and entry. Thus the degree of access to political rights by citizens thus strongly affects their access to finance. Finally, we review the recent literature on the time variation of financial development across democracies during the XX century.
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