The Political Economy of Bank- and Market Dominance

Enrico Perotti and Ernst-Ludwig von Thadden

No 04-012/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

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.

Keywords: corporate governance; corporate finance; political economy; labor income; human capital; median voter (search for similar items in EconPapers)
JEL-codes: G34 P16 (search for similar items in EconPapers)
Date: 2004-01-22
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Political Economy of Bank- and Market Dominance (2003)
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