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DP3914
The Political Economy of Bank and Equity Dominance
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Publication Date:
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May 2003
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JEL(s):
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G28
, G31
, G32
, G34
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Link to this Page:
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www.cepr.org/pubs/dps/DP3914.asp
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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 labour 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 labour rents are exposed to undiversifiable firm-specific risk. In general, labour 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 share-holdings by the median voters increase, the dominance structure will move towards favoring equity markets with riskier corporate strategies and higher profits.
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Filesize: 427k
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