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Elections, special interests, and the fiscal costs of financial crisis

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  • Keefer, Philip

Abstract

The author proposes a new approach to explain why the costs of crisis are greater in some countries than in others. He begins with the premise that many crises result from the willingness of politicians to cater to special interests, at the expense of broad social interests. A parsimonious model predicts that the less costly it is for average citizens to expel politicians, the more veto players there are; the less important are exogenous shocks, and the more difficult it is for politicians and special interests to forge credible agreements, the lower the costs of crisis are. Though these predictions differ from those in the literature, empirical evidence presented shows that they explain the fiscal costs of financial crisis, even after controlling for the financial sector policies believed to contribute most to the efficient prevention, and resolution of financial crisis.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3439.

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Date of creation: 01 Oct 2004
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Handle: RePEc:wbk:wbrwps:3439

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Keywords: Banks&Banking Reform; Payment Systems&Infrastructure; Decentralization; Economic Theory&Research; National Governance; National Governance; Economic Theory&Research; Banks&Banking Reform; Financial Crisis Management&Restructuring; Financial Intermediation;

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  1. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(7), pages 1373-1406, October.
  2. Nicola Persico & Alessandro Lizzeri, 2001. "The Provision of Public Goods under Alternative Electoral Incentives," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 225-239, March.
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  5. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1170-88, December.
  6. Torsten Persson & Guido Tabellini, 1998. "The Size and Scope of Government: Comparative Politics with Rational Politicians," NBER Working Papers 6848, National Bureau of Economic Research, Inc.
  7. Charles W. Calomiris & Eugene N. White, 1994. "The Origins of Federal Deposit Insurance," NBER Chapters, in: The Regulated Economy: A Historical Approach to Political Economy, pages 145-188 National Bureau of Economic Research, Inc.
  8. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  9. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
  10. Acemoglu, Daron & Robinson, James A, 1999. "Inefficient Redistribution," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2122, C.E.P.R. Discussion Papers.
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  12. Besley, Timothy J. & Burgess, Robin, 2001. "The Political Economy of Government Responsiveness: Theory and Evidence from India," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2721, C.E.P.R. Discussion Papers.
  13. Kroszner, Randall S & Strahan, Philip E, 1996. " Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1285-1319, September.
  14. Charles P. Kindleberger, 2000. "Comparative Political Economy," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262112469, December.
  15. Besley, Timothy & Coate, Stephen, 2001. "Lobbying and Welfare in a Representative Democracy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 67-82, January.
  16. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
  17. Gene Grossman & Elhanan Helpman, 1994. "Electoral Competition and Special Interest Politics," NBER Working Papers 4877, National Bureau of Economic Research, Inc.
  18. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(8), pages 1539-1560, August.
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Citations

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Cited by:
  1. Cesar Calderon & Alberto Chong, 2006. "Do Democracies Breed Rent-seeking Behavior?," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(4), pages 247-260.
  2. Feijen, Erik, 2005. "Do incumbents manipulate access to finance during banking crises?," Policy Research Working Paper Series 3660, The World Bank.
  3. César Calderón & Alberto Chong, 2005. "¿Fomentan las democracias conductas de procura de rentas?," Research Department Publications, Inter-American Development Bank, Research Department 4416, Inter-American Development Bank, Research Department.

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