Title

Credit market frictions and political failure

Publication Type

Journal Article

Publication Date

8-2016

Abstract

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

Adverse selection; Asset liquidation; Market failure; Occupational choice; Political failure; Property rights

Discipline

Economic Policy

Research Areas

Macroeconomics

Publication

Journal of Monetary Economics

Volume

81

First Page

48

Last Page

64

ISSN

0304-3932

Identifier

10.1016/j.jmoneco.2016.03.012

Publisher

Elsevier

Additional URL

http://doi.org/10.1016/j.jmoneco.2016.03.012

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