Politics and Finance

Ruben Enikolopov and Maria Petrova

Spring 2010

This course aims to overview the literature on the interactions between financial and political markets. The questions of primary interest are about the effects of political institutions or political events on financial outcomes. How political institutions affect financial regulations? How political connections affect firm-level performance? What drives financial development? How financial crises change composition of special interest groups in power? These are examples of questions discussed in the class.

The class will focus on empirical research, though some theoretical models will be included as well. The final grade for the course will consist of 6 short referee reports (together carrying 40% weight; report with the lowest grade will not be counted), class participation (with 10% weight) and the final exam (with 50% weight).

Financial Regulation: banks

  • Burton Abrams and Russell Settle, “Pressure-group Influence and Institutional Change: Branch-banking Legislation during the Great Depression,” Public Choice, LXXVII (1993): 687-705.
  • Nicolas Economides, R. Glenn Hubbard, and Darius Palia, “The Political Economy of Branching Restrictions and Deposit Insurance,” Journal of Law and Economics, XXXIX (October 1996): 667-704.
  • Randall Kroszner and Philip Strahan. “What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions,” Quarterly Journal of Economics 114 (November 1999): 1437-67.
  • Barth, Caprio, and Levine (2004) "Bank Regulation and Supervision: What Works Best?" Journal of Financial Intermediation, 13, 205-248
  • Levine, R., 2005, The corporate governance of banks: A concise discussion of concepts and evidence, World Bank Policy Research Working Paper No. 3404ю
  • Clayes, Lanine and Schoors (2005)"Bank Supervision Russian Style: Rules versus Enforcement and Tacit Objectives," William Davidson Institute working paper
  • Haber, Stephen, 2005, “ Political Institutions, Banks, and Economic Growth: Evidence from the United States and Mexico”, Stanford University WP.

Financial Regulation: other

  • Raghuram G. Rajan and Luigi Zingales, “The Great Reversals: The Politics of Financial Development in the Twentieth Century,” Journal of Financial Economics 69(2003): 5-50.
  • Stephen Nunez and Howard Rosenthal, “Bankruptcy Reform in Congress: Creditors, Committees, Ideology, and Floor Voting in the Legislative Process,” Journal of Law, Economics & Organization 20 (2004): 527-557.
  • Efriam Benmelech and Tobias Moskowitz, “The Political Economy of Financial Regulation: Evidence from U.S. Usury Laws in the 19th Century,” January 2006.
  • Philip Keefer, “Elections, Special Interests and Financial Crisis,” International Organization (forthcoming)
  • J. Lawrence Broz and Michael Brewster Hawes, “Congressional Politics of Financing the International Monetary Fund,” International Organization 60, 1 (Spring 2006): 367-399.
  • Luigi Zingales Raghuram G. Rajan "Making Capitalism Work for Everyone," Journal of Applied Corporate Finance, Fall 2004, 101-108
  • Morck, R., D. Stangeland, and B. Yeung, 1998, Inherited wealth, corporate control, and economic growth, in Concentrated Corporate Ownership, R. Morck (ed.), the University of Chicago Press.
  • Braun, Matías and Claudio Raddatz1, 2008, “The Politics of Financial Development: Evidence from Trade Liberalization,” Journal of Finance, forthcoming.

Political Intervention in Credit Markets

  • Alston, Lee J., 1983. “Farm Foreclosures in the United States During the Interwar Period.” Journal of Economic History, 43, 885-903.
  • Alston, Lee J., 1983. “Farm Foreclosure Moratorium Legislation: A Lesson from the Past. American Economic Review, 74: 445-57.
  • Kroszner, Randall S. 2003. “Is It Better to Forgive than to Receive? An Empirical Analysis of the Impact of Debt Repudiation”, working paper
  • Rucker, Randal R. and Lee J. Alston, 1987. “Farm Failures and Government Intervention: A Case Study of the 1930’s. American Economic Review, 77. 724-730.
  • Bolton, Patrick and Howard Rosenthal, 2002 “Political Intervention in Credit Markets”. Journal of Political Economy,October, 110: 1103-34.
  • Hansen, Bradley A. and Mary Eschelbach Hansen 2003. The Transformation of Bankruptcy in the United States”, paper presented at the Princeton conference on the Political Economy of Financial Markets, Sept. 26-27, 2003.

Political economy models of corporate governance

  • Marco Pagano and Paolo Volpin “The Political Economy of Corporate Governance”, The American Economic Review, Vol. 95, No. 4, September 2005.
  • Marco Pagano and Paolo Volpin “Shareholder Protection, Stock Market Development, and Politics” Journal of the European Economic Association, Vol. 4, No. 2-3, April-May 2006, 315-341.
  • Art Durnev & Sergei Guriev, 2007. "The Resource Curse: A Corporate Transparency Channel," Working Papers w0108, Center for Economic and Financial Research (CEFIR)
  • Durnev, Art and Fauver, Larry, "Stealing from Thieves: Firm Governance and Performance When States are Predatory," working paper
  • Bebchuk, Lucian Arye and Neeman, Zvika, "Investor Protection and Interest Group Politics" (December 2007). NBER Working Paper No. W13702
  • Stulz, R. M. (2005) The Limits of Financial Globalization Journal of Finance, 60, 1595-1638
  • Enrico C. Perotti and Ernst-Ludwig von Thadden (2006) "The Political Economy of Corporate Control and Labor Rents," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 145-174, February.
  • Desai, M. A.; Dyck, A. & Zingales, L. Theft and Taxes (2007) Journal of Financial Economics, 84(3), 591-623.
  • Dyck, Alexander, Volchkova, Natalia, and Zingales, Luigi (2008) “The Corporate Governance Role of the Media: Evidence from Russia,” The Journal of Finance, 63 (3), 1093-1135

Political connections and financial markets

  • Ray Fisman “Estimating the Value of Political Connections”, American Economic Review, September 2001, 1095-1102
  • Asim Ijaz Khwaja and Atif Mian “Do Lenders Favor Politically Connected Firms? Rent provision in an Emerging Financial Market” Quarterly Journal of Economics, Vol. 120, Issue 4, November 2005
  • Mara Faccio“Politically connected firms”, American Economic Review, vol. 96(1), March 2006, 369-386
  • Faccio, M., W. Masulis, and J. McConnell, 2005, Political connections and corporate bailouts, Journal of Finance, forthcoming.
  • Leuz, Christian, and Felix Oberholzer, “Political relationships, global financing, and corporate transparency”, Journal of Financial Economics, Volume 81, Issue 2, August 2006, Pages 411-439
  • Marianne Bertrand, Francis Kramarz, Antoinette Schoar, and David Thesmar “Politically connected CEOs and corporate outcomes: Evidence from France”, Working paper.
  • Dinc, S., 2005, Politicians and banks: Political influences on government-owned banks in emerging countries, Journal of Financial Economics 77.
  • Carvalho, Daniel (2008) “Incentives to Create or Relocate? Firm Investment and Credit Subsidies in an Emerging Market,” working paper.
  • Vyacheclav Dombrovsky, (2008) “Do political connections matter? Firm-level evidence from Latvia,” working paper.
  • Vyacheclav Dombrovsky (2008) “Campaign contributions and firm performance: the ‘Latvian Way’,” working paper.

Political prediction markets

  • Erik Snowberg, Justin Wolfers, and Eric Zitzewitz “Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections”, Quarterly Journal of Economics, May 2007, 122(2) 807-829
  • Knight, Brian, 2007. "Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 Presidential Election," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 389-409, February.
  • Justin Wolfers, and Eric Zitzewitz “Using Markets to Inform Policy: The Case of the Iraq War”, Economica, forthcoming.
  • Rhode, Paul and Koleman Strumpf, “Manipulating Political Stock Markets: A FieldExperiment and a Century of Observational Data”, working paper, 2007

Political events and financial markets

  • Amihud, Yakov and Avi Wohl (2004), “Political News and Stock Prices: The Case of SaddamHussein Contracts,” Journal of Banking and Finance, 28(5), 1185-1200.
  • Rigobon, Roberto and Brian Sack (2005), “The Effects of War Risk on U.S. Financial Markets,”Journal of Banking and Finance, 29, 1769-1789.
  • Goriaev Alexei, Sonin Konstantin “Is Political Risk Company-Specific? The Market Side of the Yukos Affair”, working paper
  • Jianping Mei and Limin Guo, "Political Uncertainty, Financial Crisis, and Market Volatility" European Financial Management, Volume 10,Number 4, December 2004 , pp. 639-657(19).
  • Bernhard, William, David Leblang,Democratic processes and financial markets : pricing politics: Ch. 3-4. Cambridge University Press, 2006.
  • Jordan Siegel and Mark Roe “Political Instability and Financial Development”, working paper

Politics and foreign investment

  • Henisz, Witold. 2000. "The Institutional Environment for Multinational Investment." Journal of Law, Economics, and Organization 16:2, pp. 334-364
  • Henisz, W. J. & B. A. Zelner. 2004. Interest Groups, Veto Points and Electricity Infrastructure Deployment
  • Jensen, Nathan M. 2003. "Democratic Governance and Multinational Corporations: The Political Economy of Foreign Direct Investment." International Organization 57:3 (Summer).
  • Li, Quan, and Adam Resnick. 2003. "Reversal of Fortunes: Democracy, Property Rights and Foreign Direct Investment Inflows in Developing Countries." International Organization 57(1):1-37.
  • Antràs, P, Desai, M. and F. Foley (2008) "Multinational Firms, FDI Flows and Imperfect Capital Markets" Quarterly Journal of Economics, forthcoming.