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Financial Contracts and the Political Economy of Investor Protection

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  • Pavel Ševcík

Abstract

This paper studies the joint dynamics of investor protection and economic development in a political economy model with capital accumulation and occupational choice. Less investor protection implies higher costs of external financing for entrepreneurs. This excludes poorer agents from entrepreneurship, increasing the profits of the remaining entrepreneurs. The main determinants of investor protection policy preferences are the agent's net worth and the expected return from entrepreneurship. When the policy is chosen by the simple majority rule, the model generates several implications consistent with the observed variation of investor protection over time and across countries. (JEL D72, E22, E32, G18, G38, J24, L26)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 4 (2012)
Issue (Month): 4 (October)
Pages: 163-97

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Handle: RePEc:aea:aejmac:v:4:y:2012:i:4:p:163-97

Note: DOI: 10.1257/mac.4.4.163
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  1. Aldo Musacchio, 2008. "Laws versus Contracts: Shareholder Protections and Ownership Concentration in Brazil, 1890–1950," Business History Review, Harvard Business School, Harvard Business School, vol. 82(3), pages 445-473, September.
  2. Bonfiglioli, Alessandra, 2012. "Investor protection and income inequality: Risk sharing vs risk taking," Journal of Development Economics, Elsevier, Elsevier, vol. 99(1), pages 92-104.
  3. Andres Erosa & Ana Hidalgo, 2007. "On Finance as a Theory of TFP, Cross-Industry Productivity Differences, and Economic Rents," Working Papers, University of Toronto, Department of Economics tecipa-285, University of Toronto, Department of Economics.
  4. Scarpetta, Stefano & Fally, Thibault & Aghion, Philippe, 2007. "Credit Constraints as a Barrier to the Entry and Post-Entry Growth of Firms," Scholarly Articles 4554208, Harvard University Department of Economics.
  5. Musacchio, Aldo, 2008. "Can Civil Law Countries Get Good Institutions? Lessons from the History of Creditor Rights and Bond Markets in Brazil," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 68(01), pages 80-108, March.
  6. Caroline Fohlin, 2005. "The History of Corporate Ownership and Control in Germany," NBER Chapters, in: A History of Corporate Governance around the World: Family Business Groups to Professional Managers, pages 223-282 National Bureau of Economic Research, Inc.
  7. Aldo Musacchio, 2010. "Law and Finance c. 1900," NBER Working Papers 16216, National Bureau of Economic Research, Inc.
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Cited by:
  1. Rahul Mukherjee, 2013. "Institutions, Corporate Governance and Capital Flows," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 10-2013, Economics Section, The Graduate Institute of International Studies.
  2. Ramin Dadasov & Philipp Harms & Oliver Lorz, 2010. "Financial Integration in Autocracies: Greasing the Wheel or More to Steal?," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201014, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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