Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86363
Authors: 
Feijen, Erik
Perotti, Enrico
Year of Publication: 
2005
Series/Report no.: 
Tinbergen Institute Discussion Paper 05-115/2
Abstract: 
While financial liberalization has in general favorable effects, reforms in countries with poor regulation is often followed by financial crises. We explain this variation as the outcome of lobbying interests capturing the reform process. Even after liberalization, market investors must rely on enforcement of investor protection, which may be structured so as to block funding for new entrants, or limit their access to refinance after a shock. This forces inefficient default and exit by more leveraged entrepreneurs, protecting more established producers. As a result, lobbying may deliberately worsen financial fragility. After large external shocks, borrowers from the political elite in very corrupt countries may successfully lobby for weak enforcement, and retain control of collateral. We provide evidence that industry exit rates and profit margins after banking crises are higher in the most corrupt countries.
Subjects: 
Politics
Lobbying
Financial Development
Investor protection
JEL: 
G21
G28
G32
Document Type: 
Working Paper

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