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Political origins of financial structure

  • Bhattacharyya, Sambit

There is growing policy interest in the role of financial structure in promoting development. However, very little is known about how different financial structures emerge and evolve. In this paper we empirically assess the political origins of financial structure. Using difference–in difference estimation and annual data, we study the effects of democratization on financial structure in a sample of 96 countries covering the period 1970–2005. Democratization here corresponds to the event of becoming a democracy. We find that democratization leads to a more market-based financial system. Democratic change could also be incremental rather than a one off. To identify the effect of incremental democratic change on financial structure we estimate a separate model and find that democracy matters. We also find that countries with substantial democratic capital are more likely to have a market-based financial structure. Our main results are robust to a variety of controls, Arellano–Bond GMM estimation, alternative measures of democracy and financial structure, and across different samples.

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Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 41 (2013)
Issue (Month): 4 ()
Pages: 979-994

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Handle: RePEc:eee:jcecon:v:41:y:2013:i:4:p:979-994
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622864

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  1. Thorsten Beck & Ross Levine, 2002. "Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?," NBER Working Papers 8982, National Bureau of Economic Research, Inc.
  2. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2000. "The Role of Social Capital in Financial Development," CRSP working papers 511, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Chakraborty, Shankha & Ray, Tridip, 2007. "The development and structure of financial systems," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 2920-2956, September.
  4. Sambit Bhattacharyya & Paul Collier, 2011. "Public Capital in Resource Rich Economies: Is there a Curse?," Economics Series Working Papers WPS/2011-14, University of Oxford, Department of Economics.
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  9. Persson, Torsten & Tabellini, Guido, 2006. "Democracy and Development: The Devil in the Details," CEPR Discussion Papers 5499, C.E.P.R. Discussion Papers.
  10. Sambit Bhattacharyya & Roland Hodler, 2008. "Natural Resources, Democracy and Corruption," OxCarre Working Papers 020, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  11. Hausman, Jerry & Stock, James H. & Yogo, Motohiro, 2005. "Asymptotic properties of the Hahn-Hausman test for weak-instruments," Economics Letters, Elsevier, vol. 89(3), pages 333-342, December.
  12. Collier, Paul & Hoeffler, Anke, 2009. "Testing the neocon agenda: Democracy in resource-rich societies," European Economic Review, Elsevier, vol. 53(3), pages 293-308, April.
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