The Political Economy of Financial Innovation: Evidence from Local Governments

Christophe Perignon () and Boris Vallee

The Review of Financial Studies, 2017, vol. 30, issue 6, 1903-1934

Abstract: We investigate the development of an innovative and high-risk type of borrowing for local governments, known as structured loans. Using transaction data for more than 2,700 local governments in France, we show that the adoption of these instruments is more frequent for politicians from highly indebted local governments, from politically contested areas, and during political campaigns. Taking on structured loans helps incumbents win a reelection, and initially allows them to maintain lower taxes. Our findings illustrate how financial innovation can amplify principal-agent problems within the political system.

JEL-codes: G11 G32 H74 P16 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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