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The Political Economy of Bank- and Market Dominance

Author

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  • Enrico Perotti
  • Ernst-Ludwig von Thadden

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.

Suggested Citation

  • Enrico Perotti & Ernst-Ludwig von Thadden, 2002. "The Political Economy of Bank- and Market Dominance," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.14, Université de Lausanne, Faculté des HEC, DEEP, revised Apr 2003.
  • Handle: RePEc:lau:crdeep:02.14
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Aggarwal, Raj & Goodell, John W., 2009. "Markets versus institutions in developing countries: National attributes as determinants," Emerging Markets Review, Elsevier, vol. 10(1), pages 51-66, March.
    2. Marco Pagano & Paolo F. Volpin, 2005. "The Political Economy of Corporate Governance," American Economic Review, American Economic Association, pages 1005-1030.
    3. Zsuzsanna Fluck & Colin Mayer, 2005. "Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law," Annals of Finance, Springer, pages 349-378.
    4. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 502-519.
    5. Harilaos Mertzanis, 2011. "The effectiveness of corporate governance policy in Greece," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 19(3), pages 222-243, July.
    6. René M. Stulz, 2007. "The Limits of Financial Globalization," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 8-15.
    7. Michael Graff, 2005. "Law and Finance: Common-law and Civil-law Countries Compared," KOF Working papers 05-99, KOF Swiss Economic Institute, ETH Zurich.
    8. Fogel, Kathy & Morck, Randall & Yeung, Bernard, 2008. "Big business stability and economic growth: Is what's good for General Motors good for America?," Journal of Financial Economics, Elsevier, vol. 89(1), pages 83-108, July.
    9. 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.
    10. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March.
    11. 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 measureme
      ," MPRA Paper 15630, University Library of Munich, Germany.

    More about this item

    Keywords

    corporate governance; banks versus markets; politics;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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