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The Political Economy of Bank- and Market Dominance

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Author Info
Enrico Perotti
Ernst-Ludwig von Thadden

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Abstract

Legislation affects corporate governance and the return to human and financial capital. We allow the preference of a political majority to determine both the governance structure and the extent of labor rents. In a society where median voters have relatively more at stake in the form of human capital rather than financial wealth, they prefer a less risky environment even when this reduces profits, as labor rents are exposed to undiversifiable firm-specific risk. In general, labor and lenders prefer less corporate risk, since their claims are a concave function of firm profitability. This congruence of interests can lead the political majority to support bank over equity dominance. As shareholdings by the median voters increase, the dominance structure will move towards favoring equity markets with riskier corporate strategies and higher profits.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 02.14.

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Length: 40 pp.
Date of creation: Mar 2002
Date of revision: Apr 2003
Handle: RePEc:lau:crdeep:02.14

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.65
Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

For technical questions regarding this item, or to correct its listing, contact: (Claudine Delapierre Saudan).

Related research
Keywords: corporate governance; banks versus markets; politics;

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Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Robert Carpenter & Laura Rondi, 2000. "Italian Corporate Governance, Investment, and Finance," Empirica, Springer, vol. 27(4), pages 365-388, December. [Downloadable!] (restricted)
  3. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," CSEF Working Papers 76, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  4. Claessens, Stijn & Klapper, Leora F., 2002. "Bankruptcy around the world - explanations of its relative use," Policy Research Working Paper Series 2865, The World Bank. [Downloadable!]
    Other versions:
  5. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March. [Downloadable!]
  6. Marco Pagano & Paolo Volpin, 1999. "The Political Economy of Corporate Governance," CSEF Working Papers 29, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2005. [Downloadable!]
    Other versions:
  7. Brunner, Antje & Krahnen, Jan Pieter, 2004. "Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring," CEPR Discussion Papers 4287, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Benjamin E. Hermalin & Michael L. Katz, 2000. "Corporate Diversification and Agency," Finance 9912001, EconWPA. [Downloadable!]
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  9. Welch, Ivo, 1997. "Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 1203-36.
  10. Raghuram G. Rajan & Luigi Zingales, 2000. "The Great Reversals: The Politics of Financial Development in the 20th Century," OECD Economics Department Working Papers 265, OECD, Economics Department. [Downloadable!]
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  11. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October. [Downloadable!] (restricted)
  12. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October. [Downloadable!] (restricted)
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  13. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 33-68 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  14. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giovanni Cespa & Giacinta Cestone, 2002. "Stakeholder Activism, Managerial Entrenchment, and the Congruence of Interests between Shareholders and Stakeholders," Economics Working Papers 634, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  2. Michael Graff, 2005. "Law and Finance: Common-law and Civil-law Countries Compared," KOF Working papers 05-99, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  3. Pagano, Marco & Volpin, Paolo, 2001. "The Political Economy of Corporate Governance," CEPR Discussion Papers 2682, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Kathy Fogel & Randall Morck & Bernard Yeung, 2006. "Big Business Stability and Economic Growth: Is What's Good for General Motors Good for America?," NBER Working Papers 12394, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Rene M. Stulz, 2005. "The Limits of Financial Globalization," NBER Working Papers 11070, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Zsuzsanna Fluck & Colin Mayer, 2005. "Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law," OFRC Working Papers Series 2005fe07, Oxford Financial Research Centre. [Downloadable!]
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  7. Claessens, Stijn & Underhill, Geoffrey R D, 2005. "The Need for Institutional Changes in the Global Financial System: An Analytical Framework," CEPR Discussion Papers 4970, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," CSEF Working Papers 76, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  9. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March. [Downloadable!]
  10. Chisari, Omar O. & Ferro, Gustavo, 2009. "Gobierno Corporativo: los problemas, estado actual de la discusión y un ejercicio de medición para Argentina
    [Corporate Governance: the problems, the current stage of the discussion and a measure    ," MPRA Paper 15630, University Library of Munich, Germany. [Downloadable!]
  11. Stulz, Rene M., 2005. "The Limits of Financial Globalization," Working Paper Series 2005-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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