The Political Economy of Financial Fragility
AbstractWhile financial liberalization has in general favourable effects, reforms in countries with poor regulation is often followed by financial crises. We explain this variation as the outcome of lobbying interests capturing the reform process. Even after liberalization, market investors must rely on enforcement of investor protection, which may be structured so as to block funding for new entrants, or limit their access to refinance after a shock. This forces inefficient default and exit by more leveraged entrepreneurs, protecting more established producers. As a result, lobbying may deliberately worsen financial fragility. After large external shocks, borrowers from the political elite in very corrupt countries may successfully lobby for weak enforcement, and retain control of collateral. We provide evidence that industry exit rates and profit margins after banking crises are higher in the most corrupt countries.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5317.
Date of creation: Oct 2005
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Other versions of this item:
- Erik Feijen & Enrico Perotti, 2006. "The Political Economy of Financial Fragility," Hi-Stat Discussion Paper Series d05-160, Institute of Economic Research, Hitotsubashi University.
- Erik Feijen & Enrico Perotti, 2005. "The Political Economy of Financial Fragility," Tinbergen Institute Discussion Papers 05-115/2, Tinbergen Institute.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-CFN-2005-12-09 (Corporate Finance)
- NEP-ENT-2005-12-09 (Entrepreneurship)
- NEP-FMK-2005-12-09 (Financial Markets)
- NEP-PKE-2005-12-09 (Post Keynesian Economics)
- NEP-POL-2005-12-09 (Positive Political Economics)
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