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Democratic Political Economy of Financial Regulation

Author

Listed:
  • Igor Livshits
  • Youngmin Park

Abstract

We establish that inefficiently lax financial regulation can arise democratically. Lax regulation leads to banks issuing risky mortgages at less than actuarially fair interest rates. This creates additional demand for houses and increases house prices, generating nontrivial distribution of winners and losers. Renters and individuals with large nonhousing wealth suffer from the induced banking fragility, while young middle‐wealth households benefit from mispriced mortgages and old homeowners benefit from higher house prices. When these latter two groups constitute a majority, regulatory failure can be a democratic outcome. Voting patterns in US Congress provide empirical support for this mechanism.

Suggested Citation

  • Igor Livshits & Youngmin Park, 2026. "Democratic Political Economy of Financial Regulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 67(2), pages 451-473, May.
    • Handle: RePEc:wly:iecrev:v:67:y:2026:i:2:p:451-473
    DOI: 10.1111/iere.12781
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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