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  3. American Economic Journal: Macroeconomics
  4. October 2012
  5. Financial Contracts and the Political Economy of Investor Protection

Financial Contracts and the Political Economy of Investor Protection

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Abstract

This paper studies the joint dynamics of investor protection and economic development in a political economy model with capital accumulation and occupational choice. Less investor protection implies higher costs of external financing for entrepreneurs. This excludes poorer agents from entrepreneurship, increasing the profits of the remaining entrepreneurs. The main determinants of investor protection policy preferences are the agent's net worth and the expected return from entrepreneurship. When the policy is chosen by the simple majority rule, the model generates several implications consistent with the observed variation of investor protection over time and across countries. (JEL D72, E22, E32, G18, G38, J24, L26)

Citation

Ševčík, Pavel. 2012. "Financial Contracts and the Political Economy of Investor Protection." American Economic Journal: Macroeconomics, 4 (4): 163-97. DOI: 10.1257/mac.4.4.163

Additional Materials

JEL Classification

  • D72 Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
  • E22 Capital; Investment; Capacity
  • E32 Business Fluctuations; Cycles
  • G18 General Financial Markets: Government Policy and Regulation
  • G38 Corporate Finance and Governance: Government Policy and Regulation
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • L26 Entrepreneurship
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