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The Political Economy of Corporate Control


  • Enrico Perotti

    () (University of Amsterdam)

  • Ernst-Ludwig von Thadden

    () (Mannheim Universitaet)


In a democracy, a political majority can influence both the corporategovernance structure and the return to human and financial capital.We argue that when financial wealth is sufficiently diffused, thereis political support for a strong governance role for dispersed equitymarket investors, and low labor rents. When financial wealth is concentrated,a political majority prefers high labor rents and a strongergovernance role for banks or large investors, even at the cost of profits.The intuition is that labor claims are exposed to undiversifiable risk,so voters with low financial stakes prefer investors who choose lowerrisk strategies. The model may explain the ”great reversal” phenomenonin the first half of the 20th century (Rajan and Zingales, 2003).We argue that in several financially developed countries a financiallyweakened middle class became concerned about labor income risk associatedwith free markets and supported a more corporatist financialsystem. We offer suggestive evidence using post WW1 inflationaryshocks as the source of identifying exogenous variation. See also publication in the 'Journal of Political Economy' , 2006, 114(1) 145-175.

Suggested Citation

  • Enrico Perotti & Ernst-Ludwig von Thadden, 2005. "The Political Economy of Corporate Control," Tinbergen Institute Discussion Papers 05-102/2, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20050102

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    References listed on IDEAS

    1. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
    2. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    3. Gorton, Gary & Schmid, Frank A., 2000. "Universal banking and the performance of German firms," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 29-80.
    4. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    5. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October.
    6. Franks, Julian R & Mayer, Colin & Rossi, Stefano, 2003. "The Origination and Evolution of Ownership and Control," CEPR Discussion Papers 3822, C.E.P.R. Discussion Papers.
    7. Shiller, Robert J., 1998. "Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks," OUP Catalogue, Oxford University Press, number 9780198294184.
    8. Welch, Ivo, 1997. "Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1203-1236.
    9. Perotti, Enrico C. & Von Thadden, Ernst-Ludwig, 2003. "Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 61-86, March.
    10. René M. Stulz, 2007. "The Limits of Financial Globalization," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 8-15.
    11. Demirguc-Kunt, Asli & Levine, Ross, 1999. "Bank-based and market-based financial systems - cross-country comparisons," Policy Research Working Paper Series 2143, The World Bank.
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    Cited by:

    1. Enrico Perotti & Paolo Volpin, 2007. "Investor Protection and Entry," Tinbergen Institute Discussion Papers 07-006/2, Tinbergen Institute.
    2. Bordo, Michael D. & Rousseau, Peter L., 2006. "Legal-political factors and the historical evolution of the finance-growth link," European Review of Economic History, Cambridge University Press, vol. 10(03), pages 421-444, December.
    3. Abe, Naohito & Shimizutani, Satoshi, 2007. "Employment policy and corporate governance-- An empirical comparison of the stakeholder and the profit-maximization model," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 346-368, June.

    More about this item


    Corporate governance; political economy; bank control; investor protection;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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