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Aristocratic Privilege. Exploiting “Good†Institutions

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  • Oosterlinck, Kim
  • Ureche-Rangau, Loredana
  • Vaslin, Jacques-Marie

Abstract

According to North and Weingast (1989), institutions that protect bondholders’ rights lower borrowing costs for the state and are therefore beneficial to both the state and the bondholders. In this paper we argue that such institutions may be so strong that bondholders can exploit them for their own benefit, not the state’s. To prove this point, we focus on the (non-)conversion of French bonds during the second quarter of the 19th century. At the time, France was able to convert its bonds. In other words, the state could ask bondholders to choose between redemption at par or a new bond with a lower coupon. Even though improvements in French credit meant the state could benefit from converting its debt as early as May 1825, no conversion took place before March 1852. Had it occurred at the first date, the French state would have saved the equivalent of 2.7 years of debt service. Our analysis shows that the institutions prevailing at the time gave large bondholders the power to veto any conversion.

Suggested Citation

  • Oosterlinck, Kim & Ureche-Rangau, Loredana & Vaslin, Jacques-Marie, 2019. "Aristocratic Privilege. Exploiting “Good†Institutions," CEPR Discussion Papers 14071, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14071
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    More about this item

    Keywords

    Institutions; Sovereign debts; France; Conversions;
    All these keywords.

    JEL classification:

    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
    • N43 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Europe: Pre-1913
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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