Credit market frictions and political failure

Aneya, Madhav S., Ghatak, Maitreesh ORCID: 0000-0002-0126-0897 and Morelli, Massimo (2016) Credit market frictions and political failure. Journal of Monetary Economics, 81. pp. 48-64. ISSN 0304-3932

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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.

Item Type:	Article
Official URL:	http://www.sciencedirect.com/science/journal/03043...
Additional Information:	© 2016 Elsevier B.V.
Divisions:	Economics STICERD
Subjects:	H Social Sciences > HC Economic History and Conditions
Date Deposited:	11 May 2016 14:25
Last Modified:	14 Sep 2024 07:05
URI:	http://eprints.lse.ac.uk/id/eprint/66487

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