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Economics and Politics of Alternative Institutional Reforms

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  • Francesco Caselli

    (LSE, CEPR, and NBER)

  • Nicola Gennaioli

    (CREI and Universitat Pompeu Fabra)

Abstract

In a model with heterogeneity in managerial talent, we compare the economic and political consequences of reforms aimed at reducing fixed costs of entry (deregulation) and improving the efficiency of financial markets (financial reform). The effects of these reforms depend on the market where control rights over incumbent firms are traded. In the absence of a market for control, both reforms increase the number and the average quality of firms, and are politically equivalent. When a market for control exists, financial reform induces less entry than deregulation, and endogenously compensates incumbents, thereby encountering less political opposition from them. Using this result, we show that financial reform may be used in the short run to open the way for future deregulation. Our model sheds light on the privatization and reform experiences of formerly planned economies as well as on the observed path of reforms in economies of the Organisation for Economic Co-operation and Development. (c) 2008 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 123 (2008)
Issue (Month): 3 (August)
Pages: 1197-1250

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Handle: RePEc:tpr:qjecon:v:123:y:2008:i:3:p:1197-1250

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Citations

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Cited by:
  1. Timothy Besley & Maitreesh Ghatak, 2009. "The de Soto Effect," STICERD - Economic Organisation and Public Policy Discussion Papers Series 008, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2010. "Sovereign Default, Domestic Banks and Financial Institutions," CEPR Discussion Papers 7955, C.E.P.R. Discussion Papers.
  3. Ana Fernandes, 2008. "Endogenous Political Economy: On the Inevitability of Inefficiency under the Natural Resource Curse," Diskussionsschriften dp0802, Universitaet Bern, Departement Volkswirtschaft.
  4. Gani Aldashev, 2009. "Legal institutions, political economy, and development," Oxford Review of Economic Policy, Oxford University Press, vol. 25(2), pages 257-270, Summer.
  5. Djankov, Simeon, 2008. "The Regulation of Entry: A Survey," CEPR Discussion Papers 7080, C.E.P.R. Discussion Papers.
  6. Bonfiglioli, Alessandra, 2010. "Investor Protection and Income Inequality: Risk Sharing vs Risk Taking," CEPR Discussion Papers 7853, C.E.P.R. Discussion Papers.
  7. Maria Rosaria Carillo & Vincenzo Lombardo & Alberto Zazzaro, 2013. "Family connections and entrepreneurial human capital: The uncertain destiny of proprietary capitalism," Mo.Fi.R. Working Papers 89, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  8. Sebastian Galiani & Gustavo Torrens, 2013. "Autocracy, Democracy and Trade Policy," NBER Working Papers 19321, National Bureau of Economic Research, Inc.

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