Credit market frictions and political failure
Madhav S. Aneya,
Maitreesh Ghatak () and
LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library
We study how an excessively favorable regulatory environment for banks could arise even with a perfectly competitive credit market in a median voter world. In our occupational choice model with heterogeneous wealth endowments, market failure due to unobservability of entrepreneurial talent endogenously creates a misalignment between surplus maximizing reforms and reforms that are preferred by the median voter, who is a worker. This is in contrast to the world without market failure where the electorate unanimously vote in favor of surplus maximizing institutional reforms. This paper illustrates how market failure could lead to political failure even in the benchmark political system that is free from capture by interest groups.
Keywords: Occupational choice; adverse selection; property rights; asset liquidation; political failure; market failure (search for similar items in EconPapers)
JEL-codes: N0 (search for similar items in EconPapers)
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Published in Journal of Monetary Economics, 8, April, 2016, 81, pp. 48-64. ISSN: 0304-3932
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Journal Article: Credit market frictions and political failure (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:66487
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