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The Political Economy of Financial Innovation: Evidence from Local Governments

Author

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  • Christophe Pérignon
  • Boris Vallée

Abstract

We investigate the development of an innovative and high-risk type of borrowing for local governments, known as structured loans. Using transaction data for more than 2,700 local governments in France, we show that the adoption of these instruments is more frequent for politicians from highly indebted local governments, from politically contested areas, and during political campaigns. Taking on structured loans helps incumbents win a reelection, and initially allows them to maintain lower taxes. Our findings illustrate how financial innovation can amplify principal-agent problems within the political system.

Suggested Citation

  • Christophe Pérignon & Boris Vallée, 2017. "The Political Economy of Financial Innovation: Evidence from Local Governments," The Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 1903-1934.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:6:p:1903-1934.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx029
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    Citations

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    Cited by:

    1. Anne-Laure Delatte & Adrien Matray & Noémie Pinardon-Touati, 2020. "Private Credit Under Political Influence: Evidence from France," Working Papers 2020-56, Princeton University. Economics Department..
    2. Bourdeau-Brien, Michael & Kryzanowski, Lawrence, 2019. "Municipal financing costs following disasters," Global Finance Journal, Elsevier, vol. 40(C), pages 48-64.
    3. Akey, Pat & Heimer, Rawley Z. & Lewellen, Stefan, 2021. "Politicizing consumer credit," Journal of Financial Economics, Elsevier, vol. 139(2), pages 627-655.
    4. Victoria Ivashina & Boris Vallee, 2020. "Weak Credit Covenants," NBER Working Papers 27316, National Bureau of Economic Research, Inc.
    5. Francesco D'Acunto & Laurent Frésard, 2018. "Finance, Talent Allocation, and Growth," CESifo Working Paper Series 6883, CESifo.

    More about this item

    JEL classification:

    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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