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The Political Economy of Bank and Equity Dominance

  • Perotti, Enrico C
  • von Thadden, Ernst-Ludwig

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 labour 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 labour rents are exposed to undiversifiable firm-specific risk. In general, labour 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 share-holdings 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3914.

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Date of creation: May 2003
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Handle: RePEc:cpr:ceprdp:3914
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