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Political Origins of Financial Structure

  • Sambit Bhattacharyya

There is a 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-indifference estimaton and annual data, we study the effects of democratization on financial structure in a sample of 96 countries covering the period 1970 to 2005.� Democratization here corresponds to the event of becoming a democracy.� We find that democratization leads to a more market-based financial system.� Democractic change could also be incremental rather than a one off.� To identify the causal 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, instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, alternative measures of democracy and financial structure, and across different samples.

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File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/csae-wps-2011-20.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2011-20.

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Date of creation: 01 Oct 2011
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Handle: RePEc:oxf:wpaper:wps/2011-20
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  1. Thorsten Beck & Ross Levine, 2003. "Legal institutions and financial development," Policy Research Working Paper Series 3136, The World Bank.
  2. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-63, July.
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  4. Sambit Bhattacharyya & Roland Hodler, 2010. "Do Natural Resource Revenues Hinder Financial Development?� The Role of Political Institutions," Economics Series Working Papers CSAE WPS/2010-40, University of Oxford, Department of Economics.
  5. Sambit Bhattacharyya & Roland Hodler, 2008. "Natural Resources, Democracy and Corruption," Department of Economics - Working Papers Series 1047, The University of Melbourne.
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  8. 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.
  9. 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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