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Sharing the Future: Financial Innovation and Innovators in Solving the Political Economy Challenges of Development

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  • Jha, Saumitra

    (Stanford University)

Abstract

The failure to align the incentives of self-interested groups in favor of beneficial reform is often considered a major cause of persistent underdevelopment around the world. However, much less is known about strategies that have been successful at overcoming such political economy challenges. One approach that holds much promise, and in fact appears to have had some historical success, is the provision of financial assets that align the interests of winners and potential losers from reform by providing claims on the future. This paper analyzes the role of financial instruments as a means for fostering broad political coalitions that favor beneficial reforms. It takes as a departure point the benchmark theory of portfolio choice, in which all agents hold the same (market) portfolio and thus all beneficial reforms are adopted. It then analyzes a range of historical cases in which innovative financial assets, often introduced by technocratic reformers, have succeeded at making politics less conflictual overtime, focusing on three revolutionary states that subsequently led the world in economic growth: England, the early United States and Meiji Japan. The paper draws upon the theory and the historical cases to assess the promise of finance in solving political economy challenges in contemporary settings.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2093.

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Date of creation: Oct 2011
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Handle: RePEc:ecl:stabus:2093

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  1. Alberto Alesina & Reza Baqir & Caroline Hoxby, 2002. "Political Jurisdictions in Heterogeneous Communities," Harvard Institute of Economic Research Working Papers 1949, Harvard - Institute of Economic Research.
  2. Mattozzi, Andrea., 2005. "Policy uncertainty, electoral securities and redistribution," Working Papers 1229, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. repec:hrv:faseco:4553034 is not listed on IDEAS
  4. Eric Hilt & Jacqueline Valentine, 2011. "Democratic Dividends: Stockholding, Wealth and Politics in New York, 1791-1826," NBER Working Papers 17147, National Bureau of Economic Research, Inc.
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